When you work and when you receive benefits from Social Security, taxes affect both stages.
There are two major tax-related areas to understand: the payroll taxes you pay while working that fund Social Security and Medicare, and the federal income tax you may owe on benefits you receive.
This article explains how each works, who pays what, when your benefits may be taxable, and how to plan accordingly.
What payroll taxes fund Social Security and how are they withheld?
If you work as an employee in the United States, you will generally be subject to Social Security and Medicare taxes under the payroll tax system.
These taxes are mandated under the Federal Insurance Contributions Act (FICA).
For example, your employer deducts your portion from each wage payment and contributes an equal portion.
The Social Security portion (covering Old-Age, Survivors, and Disability Insurance, or OASDI) has a wage base limit each year: only earnings up to that limit are subject to the tax.
If you are self-employed, you pay both the employer and employee portions through the self-employment tax.
What are the current rates and wage thresholds for Social Security tax?
For self-employment tax (which includes Social Security and Medicare for self-employed individuals), the rate is 15.3 % of net earnings: 12.4 % for Social Security and 2.9 % for Medicare.
For employees, the Social Security portion is 6.2 % of wages (and the employer pays the matching 6.2 %).
Once your wages exceed the annual “wage base” limit, you do not pay Social Security tax on earnings beyond that limit for the year.
The specific dollar limit changes each year based on legislation and wage index factors.
Why do we pay Social Security payroll taxes?
These payroll taxes fund the Social Security trust funds that pay current beneficiaries: retirees, people with disabilities, or survivors of deceased workers.
Your payroll taxes build your record of covered earnings and eligibility for future benefits, such as retirement or disability benefits administered by the Social Security Administration (SSA).
Are my Social Security benefits taxable when I receive them?
Yes, in many cases. Benefits from SSA, such as retirement, disability, or survivor benefits, may be partially taxable for federal income tax depending on your total income and filing status.
Benefits from Supplemental Security Income (SSI) are not taxable.
How do I know how much of my Social Security benefits are taxable?
You calculate your “combined income,” which includes your adjusted gross income (AGI), tax-exempt interest, and one-half of your Social Security benefits.
Then compare that total to base amounts defined by your filing status.
For example, if you file as single and your combined income is $25,000 or less, none of your Social Security benefits are taxable.
If your combined income is between $25,000 and $34,000, up to 50% of your benefits may be taxable. If over $34,000, up to 85% may be taxable.
The thresholds are slightly different for married filing jointly or other statuses.
What if I still work or have other income and I claim Social Security benefits early?
If you begin receiving Social Security before your full retirement age and you continue working, your benefits may be reduced and your total income may push more of your benefits into taxable territory.
The payroll taxes you pay while working still apply, and the combination of wages, benefits, and tax treatment requires planning.
The self-employment tax and FICA withholdings continue for working individuals as well.
What steps should I take to manage Social Security taxes effectively?
First, keep track of your earnings and make sure your covered wages are reported accurately; this affects both your benefit level and eligibility.
Second, when you receive Social Security benefits, check your SSA-1099 form and determine how much is taxable using IRS worksheets such as those in Publication 915.
Third, consider planning other income sources (pensions, IRAs, dividends) so that you do not unexpectedly push more of your benefits into taxable status.
Finally, if you are working and receiving benefits early, keep an eye on how your earnings and taxes interplay with your benefit amount and tax liability.
Consulting a tax professional or financial advisor is often wise.
