How To Calculate Social Security Tax
Its fairly easy to calculate your Social Security tax. You multiply your earningsup to $147,000by your Social Security tax rate, depending on whether youre an employee or are self-employed.
For example, lets say Michael works for a company and earns a salary of $150,000 in 2022. The Social Security tax applies to the first $147,000 of his wages, so his tax liability is $9,114: his $147,000 income multiplied by 6.2% .
If hes working for himself and earns the same $150,000, hell owe the full Social Security tax on his first $147,000 of income. So his liability would be $18,228: $147,000 multiplied by 12.4% . However, his tax bill may be lowered if he qualifies for the self-employment tax deduction.
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Simplifying Your Social Security Taxes
During your working years, your employer probably withheld payroll taxes from your paycheck. If you make enough in retirement that you need to pay federal income tax, then you will also need to withhold taxes from your monthly income.
To withhold taxes from your Social Security benefits, you will need to fill out Form W-4V . The form only has only seven lines. You will need to enter your personal information and then choose how much to withhold from your benefits. The only withholding options are 7%, 10%, 12% or 22% of your monthly benefit. After you fill out the form, mail it to your closest Social Security Administration office or drop it off in person.
If you prefer to pay more exact withholding payments, you can choose to file estimated tax payments instead of having the SSA withhold taxes. Estimated payments are tax payments that you make each quarter on income that an employer is not required to withhold tax from. So if you ever earned income from self-employment, you may already be familiar with estimated payments.
In general, its easier for retirees to have the SSA withhold taxes. Estimated taxes are a bit more complicated and will simply require you to do more work throughout the year. However, you should make the decision based on your personal situation. At any time you can also switch strategies by asking the the SSA to stop withholding taxes.
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Definition Ofsocial Security Contributions
Social security contributions are compulsory payments paid to general government that confer entitlement to receive a future social benefit. They include: unemployment insurance benefits and supplements, accident, injury and sickness benefits, old-age, disability and survivors pensions, family allowances, reimbursements for medical and hospital expenses or provision of hospital or medical services. Contributions may be levied on both employees and employers. Such payments are usually earmarked to finance social benefits and are often paid to those institutions of general government that provide such benefits. This indicator relates to government as a whole and is measured in percentage both of GDP and of total taxation.
Are States That Tax Social Security Benefits Worse For Retirees
Including Social Security benefits in taxable income doesnt make a state a more expensive place to retire. According to the Missouri Economic Research and Information Center, as of the third quarter of 2021, while four of the states that tax Social Security benefits have notably high cost-of-living index scores, the remaining eight fell within the two lowest-scoring groups. Kansas, in particular, had the second-lowest score in the U.S., after Mississippi.
The inverse is also true, as states that dont levy a Social Security tax arent inherently tax-friendlier places to live. When a state government doesnt garner income from one potentially taxable source, it typically makes up for it with other forms of taxation.
For instance, while Texas doesnt levy a state income tax at all , it relies heavily on taxes from a variety of other sources, including insurance taxes sin taxes on mixed beverages, tobacco products, and coin-operated machines and motor fuel taxes.
Other states that dont earn revenue from Social Security incomesuch as Arkansas, California, Louisiana, and New Yorkhave some of the highest income or sales tax rates in the U.S.
Living in a state that levies fewer taxes may be good for your budget, but it can limit the local governments ability to invest in social services that you or your loved ones may rely on, such as healthcare, infrastructure, and public transportation.
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When Do You Pay Income Tax On Social Security
People generally pay taxes on Social Security benefits when they have substantial income in addition to their benefits. These additional sources of income may include wages, self-employment, dividends, interest and other income that you must report on your tax return.
It’s possible to owe taxes on most types of Social Security income, including monthly retirement, survivor and disability benefits. However, supplemental security income payments are not taxable. It’s also important to know that SSI is not considered earned income for the Earned Income Credit.
Only In Certain States Or If Your Income Exceeds The Federal Limits
A Tea Reader: Living Life One Cup at a Time
Social Security disability benefits may be taxable if you have other income that puts you over a certain threshold. However, the majority of people who receive Social Security benefits do not have to pay taxes on their benefits because most people who meet the strict criteria to qualify for the program have little or no additional income.
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Paying Social Security Taxes On Earnings After Full Retirement Age
Everyone must make applicable Social Security contributions on income, even those working past full retirement age. Working past full retirement age may also increase Social Security benefits in the future because Social Security contributions continue to be paid in.
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When Does A Retiree’s Income Trigger Taxes
Retirees who are still working likely have at least two streams of income: Social Security benefits and a paycheck from a job. The Social Security benefits you receive can be taxable if 50% of your benefits, plus all of your other income, is greater than the specific limits for your filing status. These amounts are as follows:
Single filers, qualifying widowers and heads of households bringing in more than $25,000, based on the math above, may have to pay taxes on their Social Security benefits.
A married couple filing jointly bringing in more than $32,000, based on the math above, may have to pay taxes on their Social Security benefits.
With that, the benefits you receive may or may not be taxable based on your other income. For example, let’s say that you are a single filer that received $20,000 in Social Security benefits. Additionally, you earned $20,000 at a part-time job. When you run the numbers, 50% of your benefits plus your other income would be $30,000. With that, Uncle Sam would require you to pay federal taxes on a portion of your Social Security benefits.
As another example, let’s say a receives Social Security benefits of $20,000. You also bring in $20,000 through other sources. With that, 50% of your benefits plus your other income would be $30,000. That’s less than the base amount for married couples filing jointly. So, you wouldn’t have to pay federal income tax on any of your Social Security benefits.
Income And Taxation Of Benefits
Continuing to work, however, may lower current payments, if any, taken during the year full retirement age is reached, according to a Social Security Administration limit, which changes every year.
If the full retirement age is reached in July, for instance, the total benefit income earned from January to July must be below the limit, or Social Security benefits are lowered by $1 for every $3 of income over the limit, which is $50,520 for 2021 and $51,960 for 2022.
That money is held by the Social Security Administration and repaid incrementally once the taxpayer is no longer working. There are no limits on income earned past the month that full retirement age is reached when the full benefit amount is paid no matter how much income is earned.
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Which State Is The Most Tax
Although theres no official measure of tax friendliness, Delaware is a strong contender for the best state for retirees when it comes to taxes. The First State levies neither state or local sales tax, nor estate or inheritance tax. Delawares median property tax rate is also one of the lowest in the U.S. Its income tax rate of 6.6% is on the higher side, but its still lower than the rates imposed by 16 other states and the District of Columbia.
Other Things To Watch Out For
While everyone likes to minimize their taxes, especially ones that you can avoid without too much legwork, its important that you keep things in perspective.
Tax strategy should be part of your overall financial planning, says Crane. Dont let tax strategy be the tail that wags the dog.
In other words, make the financial moves that maximize your after-tax income, but dont make minimizing taxes your only goal. After all, those who earn no income also pay no taxes but earning no income is not a sensible financial path. For example, it can be better to find ways to maximize your Social Security benefits rather than minimizing your taxes.
And it could be financially smart to first avoid some of the biggest Social Security blunders.
Dont forget that these rules apply to minimizing your tax at the federal level, but your state may tax your Social Security benefit. The laws differ by state, so its important to investigate how your state treats Social Security.
There really arent any tricks, you just have to be careful with your interest and dividends, says Paul Miller, CPA, of Miller & Company in the New York City area.
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How Much Of Social Security Is Taxable
Although it’s possible that you won’t owe any taxes on your benefits, some Social Security recipients may owe taxes on up to 85% of their Social Security incomewhich means no taxpayer ever pays taxes on 100% of their Social Security benefits. The depends on your income from other sources and your filing status.
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Up To 85% Of Your Social Security Benefits May Be Taxable If:
- You file taxes as single, head of household or qualifying widow or widower, and the total of half your Social Security income plus income from other sources sums to more than $34,000.
- You are married and file a joint tax return, and half your Social Security income plus the total income from other sources is more than $44,000.
How Much Of Your Social Security Is Taxable
Its possible and perfectly legal to avoid paying taxes on your Social Security check. In fact, only about 40 percent of recipients pay any federal tax on their benefit.
But heres the caveat: To receive tax-free Social Security, your annual combined, or provisional, income must be under certain thresholds:
- $25,000, if youre filing as an individual
- $32,000, if youre married filing jointly
For married filing separately, the Social Security Administration simply says that youll probably pay taxes on your benefits.
Your combined income consists of three parts:
- Your adjusted gross income, not including Social Security income
- Tax-exempt interest
- 50 percent of your Social Security income
Add those amounts up and if youre under the threshold for your filing status, you wont be paying federal taxes on your benefit.
Even if youre above this threshold, however, you may not have to pay tax on your full benefit. You may pay taxes on only 50 percent of your benefit or on up to 85 percent of it, depending on your combined income.
- For individual filers:
- Combined income between $25,000 and $34,000, up to 50 percent of your benefit is taxable
- Combined income above $34,000, up to 85 percent of your benefit is taxable
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Social Security Earned Income Penalty
If you elect to turn on your Social Security benefit prior to your Normal Retirement Age AND you plan to keep working, you have to be aware of the Social Security earned income penalty. Your Normal Retirement Age is the age that you are entitled to receive your full Social Security benefit, and its based on your date of birth.
The earned income penalty ONLY applies to taxpayers that turn on their Social Security prior to their normal retirement age. Once you have reached your normal retirement age, this penalty does not apply.
Basically, the IRS limits how much you are allowed to make each year if you elect to turn on your Social Security early. If you earn over those amounts, you may have to pay all or a portion of the Social Security benefit back to the government. In the Chart below FRA stands for Fully retirement age, which is the same as Normal Retirement Age . Also note that for married couples, the earned income numbers below apply to your personal earnings, and do not take into consideration your spouses income.
INCOME UNDER $18,960: If you earned income is below $18,960, no penalty, you get to keep your full social security benefit
INCOME OVER $18,960: You lose $1 of your social security benefit for every $2 you earn over the threshold. Example:
· You turn on your social security at age 63
· Your social security benefit is $20,000 per year
· You make $40,000 per year in wages
Since you made $40,000 in wages, you are $21,040 over the $18,960 limit:
Who Is Exempt From Paying Social Security
Members of certain religious groups may be exempt from Social Security taxes. To become exempt, they must waive their rights to benefits, including hospital insurance benefits. They must also be a member of a religious sect that is conscientiously opposed to receiving private death and retirement benefits and provides food, shelter, and medical care for its members.
Most foreign students, scholars, teachers, and researchers are exempt if they are non-immigrant and non-resident aliens. Foreign citizens who work in the U.S. for a foreign government , also do not need to pay. State and local government employees covered under a public retirement plan do not need to pay twice by paying into Social Security.
Self-employed workers who make less than $400 annually do not need to worry about paying Social Security taxes. High-income individuals are also exempt from paying the tax on any earnings over the $147,000 threshold in 2022 and $160,200 in 2023. This reduces their overall Social Security tax liability.
The current Social Security tax rate is a 6.2% tax on both the employee and employer, for a total of 12.4%. If you are self-employed and make more than $400, you must cover both the employee and employer portions.