Social Security is a complicated benefit program sponsored by the U.S. federal government. Often noted as FICA (Federal Insurance Contribution Act) on your paystub, Social Security covers three benefits: disability; retirement; and Medicare. The FICA taxes you pay out of your paycheck and your employer's matching payment help fund these three programs.

The Social Security tax is a flat rate of 10.4 percent, a smaller portion of which is paid by employees and a larger portion by employers. In other words, for the year 2011, the employee pays 4.2 percent of the first $106,800 of a worker's annual pay while the employer pays 6.2 percent of the first $106,800 of a worker's annual pay. Medicare cost is an additional 1.45 percent on all pay, which is paid by both employees and employers. Altogether, if your pay is below the Social Security Taxable Wage Base ($106,800 in 2011), you pay 5.65 percent of your payroll income to FICA taxes.

Here are two examples of how FICA taxes work. If your annual income is $30,000, you will contribute $1,695 (5.65 percent of $30,000) to Social Security. Your employer will pay $2,295 (7.65 percent of $30,000) thus bringing the total contribution to $3,990. If your annual earned income is $300,000, your Social Security contribution is $4,486 (4.2 percent of the first $106,800) plus $4,350 (1.45 percent of $300,000) for a total of $8,836. Your employer will pay $10,972 (6.2 percent of the first $106,800 plus 1.45 percent of $300,000) generating a total of $19,808.

Keep in mind that the employee social security rate has been discounted for 2011 due to the Job Creation Act of 2010. The rate is expected to return from 4.2% back to 6.2% in 2012.

If you are self-employed (an independent contractor, business owner, partner in a partnership, etc.), you are responsible for paying both the employee and employer halves of the Social Security contribution.