The Answer Is More Complicated Than You Might Think Here’s How To Figure It Out
You probably know that Social Security tax is deducted from each of your paychecks and that some of that money comes back to you in the form of benefits in your senior years. But not everyone is aware that the government could gouge you again in retirement by taxing your Social Security benefits if your income in retirement reaches a certain level.
The Social Security benefit tax formula is a little complicated, but it’s something everyone should understand so they can take steps to avoid benefit taxation or at least avoid unpleasant surprises come tax season. Here’s what you need to know to determine if your benefits are at risk of being taxed.
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On the other hand, if you do have other taxable income–such as from a job, a pension or a traditional IRA–then there’s a much better chance that Uncle Sam will take a 50% or 85% bite out of your Social Security check. Plus, depending on where you live, your state might tax a portion of your Social Security benefits, too.
Income Tax Withholding Tables
2021 federal withholding tables are a bit different than they used to be. The IRS adjusts income threshold every year for inflation. That means the federal income withholding tables change every year, in addition to the tax brackets. These are the 2021 withholding tax table updates:
- Changes in tax rates and brackets
- New computational bridge for 2019 or earlier W-4s
- No withholding allowances on 2020 and later W-4s
- No personal exemptions still in effect
- Supplemental tax rate remains 22%
- Backup withholding rate remains 24%
There are also rate and bracket updates to the 2021 income tax withholding tables. The federal withholding tax table that you use will depend on the type of W-4 your employees filled out and whether you automate payroll. Employers have the option to use a computational bridge to treat 2019 or earlier W-4s as if they were 2020 or later W-4s, specifically for tax withholding purposes. If your employees filled out a 2020 or later W-4, it is important to note that they can no longer request adjustments to their withholding allowances. Instead, there is a standard withholding and a Form W-4, Step 2, Checkbox withholding section.
If youre unsure of which federal withholding tax table to use for an employee, here is an overview:
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Need More Information On Social Security
If you still have questions, you could leave a comment below, but what may be an even greater help is to join my.
Its very active and has some really smart people who love to answer any questions you may have about Social Security. From time to time Ill even drop in to add my thoughts, too.
You should also consider joining the 326,000+ subscribers on myYouTube channel! For visual learners , this is where I break down the complex rules and help you figure out how to use them to your advantage.
One last thing that you dont want to miss: Be sure to get your FREE copy of mySocial Security Cheat Sheet. This handy guide takes all of the most important rules from the massive Social Security website and condenses it all down to just one page.
Determining If You’ll Owe Social Security Benefit Taxes
The Social Security Administration sets the following thresholds when calculating Social Security benefit taxes based on your combined income and tax filing status:
|
Taxation Level |
All Other Tax Filing Statuses |
|---|---|
|
Any amount |
More than $34,000 |
Source: Social Security Administration. Married Filing Separately column assumes you lived with your spouse at any point during the year. If this is not true, refer to the All Other Tax Filing Statuses column.
If you fall into the 0% taxation range for your tax filing status, you won’t have to worry about paying any taxes on your benefits at all. If you land above this range, you will owe taxes on your benefits and you can figure out how much using the formula below.
Things are a little trickier for married couples filing separately than for other tax filing statuses. If you lived together at any point during the year, you will owe taxes on up to 85% of your benefits, regardless of your combined income. But if you didn’t live together at all, you’re subject to the same taxation rules as individuals, heads of household, and qualifying widows.
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How To Calculate Federal Tax Withholding
This article was co-authored by Cassandra Lenfert, CPA, CFP®. Cassandra Lenfert is a Certified Public Accountant and a Certified Financial Planner in Colorado. She advises clients nationwide through her tax firm, Cassandra Lenfert, CPA, LLC. With over 15 years of tax, accounting, and personal finance experience, Cassandra specializes in working with individuals and small businesses on proactive tax planning to help them keep more money to reach their goals. She received her BA in Accounting from the University of Southern Indiana in 2006.There are 9 references cited in this article, which can be found at the bottom of the page. This article has been viewed 132,799 times.
Calculating federal tax withholding can be surprisingly frustrating even though its something the majority of people have to do regularly. Luckily, with the right guidance, this yearly ritual doesnt have to be a source of stress: each tax has its own set of laws and regulations associated with it, which are clearly outlined by the IRS. Learn how to calculate your federal tax withholding today to save yourself time and energy for years to come.
Income Tax Calculator: Estimate Your Taxes
Hi Richie, Once she takes her retirement benefit, your wife is eligible for her retirement benefit plus her excess spousal benefit. Her excess spousal benefit is half of your full retirement benefit less her retirement benefit with the difference reduced if she started her spousal benefit before full retirement age.
It sounds like her excess spousal benefit is negative, which they then set to zero. So unfortunately, it looks like you folks owe SSA three months of spousal benefits that you weren’t supposed to receive.
Sorry, for the bad news. But, you can run MaxiFi Planner. I’m sure you’ll find moves outside of Social Security that will more than make up for this loss. Best, Larry
Is Your Previous Answer Correct?
Hi Larry, Is my wife’s benefit based on my PIA at FRA or is it based on the COLA increased amount if she applies two years later for spousal benefits on my record? I read online that my wife should receive a higher benefit based on the my current benefit with COLAs. But shouldn’t it be based solely on my PIA at FRA of 66 years and six months? Thanks, Matt
Hi Matt, I’ll give you an example to explain how it works. Let’s say Bill started drawing his benefits five years ago at his full retirement age . Bill’s PIA at that time was $2,000, but his PIA has risen to a current amount of $2,200 as a result of cost of living increases.
Will My Wife Get A Higher Payment Once I Retire?
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Calculating Taxes On Social Security Benefits
Many people are surprised to learn that Social Security benefits can be taxed. After all, why is the government sending you a payment one day and asking for some of it back the next? But if you take a closer look at how the federal tax on Social Security is calculated, you’ll see that many people actually don’t pay any tax on their Social Security benefits.
There’s no federal income tax on Social Security benefits for most people who only have income from Social Security. Thanks to the highest cost-of-living adjustment in 40 years, the average monthly Social Security check for a retired worker in 2022 is $1,658, which comes to $19,896 per year. That’s well below the minimum amount for taxability at the federal level.
On the other hand, if you do have other taxable income such as from a job, a pension or a traditional IRA then there’s a much better chance that Uncle Sam will take a 50% or 85% bite out of your Social Security check. Plus, depending on where you live, your state might tax a portion of your Social Security benefits, too.
payments sent by the Social Security Administration are not taxable.)
Taxes On Social Security Income Are A Relatively New Thing
At first, Social Security benefits were not taxable. That all changed with the passage of 1983 Amendments to the Social Security Act.
Under this new rule, up to 50% of Social Security benefits became taxable for certain individuals. 10 years later, the Deficit Reduction Act of 1993 expanded the taxation of Social Security benefits.
Under this Act, an additional bracket was added where up to 85% of Social Security benefits could be taxable above certain thresholds.
The combination of these laws left us with the current tax structure on Social Security benefits. Today, somewhere between 0% and 85% of your Social Security payment will be included as taxable income.
Since those brackets have been added, theyve never been changed! As far as I know, there are no plans to change them in the future. This means that as the general income levels rise, more individuals will be subject to taxation on their social security benefits.
For proof of this, look at whats already happened. Since taxes on SS benefits were introduced, the revenue coming in from these taxes have skyrocketed. Heres an example: In 2008, taxes were slightly above 15 billion dollars. In 2017, this amount was 130% higher!
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Example Of Social Security Taxation
Let’s say a single, 68-year-old retired woman, Susan, receives a Social Security benefit totaling $18,000 for 2021.
Susan collected $30,000 from other means throughout the year, so her provisional income is $39,000 .
Then, 85% of Susan’s total Social Security benefit, $15,300, is subject to federal income tax.
If you collect Social Security and anticipate you’ll need to pay federal taxes on your benefit, you can make estimated quarterly payments or elect to have federal taxes withheld either 7%, 10%, 12%, or 22% of your monthly benefit. You can also have additional taxes withheld from your other income sources, such as a pension.
Important: The following states also tax federal Social Security benefits, according to AARP: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia.
Social Security benefits for retirees, beneficiaries, and disabled people are considered a form of income by the IRS. But only a portion is subject to taxation 15% of your total benefit for the year is always tax free.
If your income for the year is more than $34,000, or more than $44,000 if you’re married, then you can expect to pay income taxes on most of the benefits you collected.
If you’d prefer to pay taxes as you go to avoid a large bill during tax season, opt in to withholding by filling out the form and returning it to your local Social Security office by mail or in person.
Taxes On Benefits Support Social Security And Medicare
The proceeds from taxing Social Security benefits provide an increasingly important source of income for both Social Security and Medicare.
- The revenue from taxing up to 50 percent of Social Security benefits is devoted to the two Social Security trust funds. In 2019, this will provide an estimated $36.9 billion in income to the Old-Age and Survivors and Disability Insurance trust funds, or about 3.5 percent of their total income. Since the income thresholds are not indexed for inflation, taxes on benefits will grow to 7.4 percent of Social Security income by 2028.
- The revenue from taxing 50 to 85 percent of Social Security benefits is devoted to Medicares Hospital Insurance trust fund. This will represent $24.1 billion, or 7.4 percent, of HI income in 2019 and 12.4 percent of income by 2028.
The taxation of benefits will provide almost $1 trillion to the Social Security and Medicare trust funds over the next ten years. Without this income, the programs would face greater funding shortfalls and earlier reserve depletion dates.
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How Do I Determine If My Social Security Is Taxable
Add up your gross income for the year, including Social Security. If you have little or no income besides your Social Security, you wont owe taxes on it. However, if youre an individual filer with at least $25,000 in gross income, including Social Security for the year, then up to 50% of your Social Security benefits may be taxable. For a couple filing jointly, the minimum is $32,000. If your gross income is $34,000 or more , then up to 85% may be taxable.
How Do I Determine Which Percentage To Elect
Every employee must consider the facts of their own situation and adjust their election accordingly.
If you want to keep your withholding approximately the same as last year, use last years federal Form W-2, or your last pay stub, to calculate which withholding percentage to elect. For example, if box 1 of federal Form W-2 shows $40,000 in wages and box 17 shows $1,000 in state income tax withheld, divide box 17 by box 1 to determine your percentage . To keep your withholding the same as last year, choose a withholding percentage of 1.8% and withhold an additional $10.77 per biweekly pay period . Be sure to take into account any amount already withheld for this year.
If you want to withhold more, choose one of the higher percentages or choose to have an additional amount withheld.
Note: Underwithholding can result in you owing tax and/or underpayment penalties when you le your Arizona return at the end of the year.
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Choose Your Calculation Method
Once youve gathered all the W-4 and payroll information you need to calculate withholding tax, you need to choose a calculation method. There are two methods you can choose from:
- The Wage Bracket Method:The wage bracket method of calculating withholding tax is the simpler of the two methods. Youll use the IRS income tax withholding tables to find each employees wage range. The instructions and tables can be found in IRS Publication 15-T.
- The Percentage Method: The percentage method is more complex and instructions are also included in IRS Publication 15-T. The instructions are different based on whether you use an automated payroll system or a manual payroll system. The worksheet walks you through the calculation, including determining the employees wage amount, accounting for tax credits, and calculating the final amount to withhold.
How To Calculate Your Paid Family And Medical Leave Withholding
To calculate the amount of Paid Family Medical Leave withheld from your paycheck, multiply your gross wages by .6%. You pay 73.22% of that 0.6%.
Note that premiums are capped at the 2022 Social Security Wage Base of $147,000 the maximum premium paid for PFML is $649.32.
You can also visit the Premiums Calculator page on the Washington State Paid Family and Medical Leave website for more information.
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How Federal Taxes On Social Security Are Calculated
Once you start collecting Social Security benefits, you’ll get a Social Security benefits statement in the mail each year in January showing the total amount of benefits you received in the previous year. To figure out how much, if any, of the total amount may be taxed, the first thing you need to do is calculate your “provisional income.” Your provisional income is generally equal to the combined total of 50% of your Social Security benefits, your tax-exempt interest, and the other non-Social Security items that make up your adjusted gross income .
For single people, your Social Security benefits aren’t taxed if your provisional income is less than $25,000. The threshold is $32,000 if you’re married and filing a joint return. If your provisional income is between $25,000 and $34,000 for a single filer, or from $32,000 to $44,000 for a joint filer, then up to 50% of your Social Security benefits may be taxable. If your provisional income is more than $34,000 on a single return, or $44,000 on a joint return, up to 85% of your benefits may be taxable.
The IRS has a handy calculator that can help you determine whether any of your Social Security benefits are taxable and, if so, how much. Once you know how much is taxable, that amount is included on Line 6b of Form 1040 and becomes part of your taxable income. That income is then taxed with other income according to your tax bracket.
Who Is Eligible For Social Security Benefits
Anyone who pays into Social Security for at least 40 calendar quarters is eligible for retirement benefits based on their earnings record. You are eligible for your full benefits once you reach full retirement age, which is either 66 and 67, depending on when you were born. But if you claim later than that – you can put it off as late as age 70 – youâll get a credit for doing so, with larger monthly benefits. Conversely, you can claim as early as age 62, but taking benefits before your full retirement age will result in the Social Security Administration docking your monthly benefits.
The bottom line: Youâre eligible for Social Security Benefits if youâve paid into the system for at least a decade, but your actual benefits will depend on what age â between 62 and 70 â you begin to claim them.
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