Apply The Ssi Tax Rates
Apply the SSI tax rates to net earnings. Schedule SE requires you to multiply your net earnings by the self-employment tax rate of 15.3 percent. This tax rate includes the SSI tax as well as the Medicare tax that you also must pay. Of this amount, 12.4 percent represents the rate of tax you will pay for SSI and 2.9 percent for Medicare. For purposes of the 12.4-percent SSI tax, the IRS only imposes the tax on a maximum of $106,800 of earnings.
Fact #: Social Security Lifts Millions Of Elderly Americans Out Of Poverty
Without Social Security benefits, about 4 in 10 Americans aged 65 and older would have incomes below the poverty line, all else being equal, according to official estimates based on the 2019 Current Population Survey. Social Security benefits lift more than 15 million elderly Americans out of poverty, these estimates show.
An important study that matches Census estimates to administrative data suggests that the official estimates overstate elderly reliance on Social Security. That study finds that in 2012, 3 in 10 elderly Americans would be poor without Social Security, and that the program lifted more than 10 million elderly Americans out of poverty.
No matter how it is measured, however, its clear that Social Security brings millions of elderly Americans out of poverty and dramatically reduces the elderly poverty rate.
Tax Deductions And Tax Credits
When you’re looking for ways to save on your taxes, you might automatically jump to tax deductions and tax credits. But do you know the difference between the two? According to H& R Block, tax credits directly decrease the amount of taxes you owe, while tax deductions lower the overall amount of your taxable income.
Since deductions lower your taxable income, they also lower the amount of taxes you owe by decreasing your tax bracket, not by lowering your actual taxes. There are standard deductions and itemized deductions:
- Almost everyone qualifies for the standard tax deduction the deduction amount varies based on your filing status , but everyone with the same filing status receives the same standard deduction amount.
- There are many possible itemized deductions, and the deduction amounts vary by individual. These are some of the most common itemized deductions:
- Certain medical and dental expenses above 7.5% of your adjusted gross income
- State income taxes
- State sales and local tax
- Property taxes
- Mortgage interest
- Student loan interest
There is a catch when it comes to itemized deductions, however. Each taxpayer is only permitted to take either their standard or itemized deductions, whichever is higher, but not both.
When it comes to tax credits, there are two types refundable or non-refundable:
Which is better? If you had to choose, you’d probably prefer to receive a tax credit. Here is a list of possible tax credits:
- Earned income credit
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Theres A Social Security Spousal Benefit
Marriage brings couples an advantage when it comes to Social Security. One spouse can take what’s called a spousal benefit, worth up to 50% of the other spouse’s Social Security benefit. For example, if your monthly Social Security benefit is worth $2,000 but your spouse’s own benefit is only worth $500, your spouse can collect a spousal benefit worth $1,000 — bringing in $500 more in income per month.
Just as the benefit based on your own work history is reduced if you claim it early, the same is true for a spousal benefit. That 50% figure is the maximum amount that only a spouse who is at least full retirement age is eligible for. Taking the spousal benefit early at, say, age 62, reduces the amount to as little as 32.5% of the higher earners benefit. If you take your own benefit early and then later switch to a spousal benefit, your spousal benefit will still be reduced.
Nanny Taxes Youre Responsible For Paying
The nanny tax isnt just Social Security and Medicare taxesreferred to as “FICA taxes“that are normally split evenly between an employer and their employee. It also includes federal income tax withholding, although you dont have to contribute to this. It takes into account the federal unemployment tax as well.
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Theres An Annual Social Security Cost
One of the best features of Social Security benefits is that the government adjusts the benefits each year based on inflation. This is called a cost-of-living adjustment, or COLA, and helps your payments keep up with increasing living expenses. The Social Security COLA is quite valuable its the equivalent of buying inflation protection on a private annuity, which can get expensive.
Because the COLA is calculated based on changes in a federal consumer price index, the size of the COLA depends largely on broad inflation levels determined by the government. In 2021, Social Security beneficiaries saw a 1.3% COLA in their monthly Social Security benefits.
The Kiplinger Letter predicted in September that the COLA for 2022 could be 6%, which would be the largest adjustment since 1982. The final COLA for 2022 will be announced on Oct. 13.
Heres what COLAs have been in other recent years:
- 2009: 5.8%
- 2021: 1.3%
How Fica Taxes Work For Employees
FICA taxes are collected through two channels: the employee and the employer. Hereâs how it works on both ends.â
The employeesâ share of FICA taxesâ
Throughout the year, FICA is automatically deducted from a W-2 employeeâs gross pay and remitted to the IRS in a process called withholding.
Many employees donât even realize theyâre paying FICA taxes! When they receive their W-2s however, the amounts paid in are reported in boxes 4 and 6.
Social Security tax is 6.2%, and itâs assessed on the first $142,800 of earned income. . Income exceeding $142,800 is exempt from Social Security.
Medicare tax is 1.45%, and itâs assessed on all earned income, with no current threshold limits. The combined rate is 7.65%.
The employerâs share of FICA taxesThe employer is required to âmatchâ the FICA taxes paid by their employees. This effectively means theyâre paying the same rate, so when an employee hits the maximum taxable threshold for Social Security, the employer also becomes exempt. The employer portion of FICA is an added cost to having employees, so the IRS allows employers to write off their half of the tax. This part is also relevant for self-employed people â more on that later!
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Tax Forms Your Nanny Must Fill Out
Its your responsibility to make sure that the individual youre hiring can legally work in the U.S. This means having them complete a U.S. Citizenship and Immigration Services Form I-9. You must have the completed form in hand by the first day your employee reports for work.
Form I-9 includes a section that you must personally complete as well, certifying that youve reviewed the documents your employee gave you for verification of identity and employment eligibility. The form comes with a list of acceptable documents your nanny can use to establish their identity and work authorization.
You dont actually have to submit this form to either USCIS or the IRS, but you are required to keep the completed form for:
- Three years after their first day of work if the employee works for you for less than two years
- One year from the day they stopped working, if they worked for you for more than two years.
Additionally, if your nanny is an employee, you’ll need to provide them with a W-4 form they fill out and return, along with any state tax forms required.
Get Ssa Benefits While Living Overseas
U.S. citizens can travel to or live in most, but not all, foreign countries and still receive their Social Security benefits. You can find out if you can receive benefits overseas by using the Social Security Administrations payment verification tool. Once you access the tool, pick the country you’re visiting or living in from the drop-down menu options.
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What Are Quarterly Taxes
Quarterly taxes, also referred to as estimated taxes, are a type of taxation you must pay in advance of the annual tax return. They work on a pay-as-you-go basis, meaning you pay them throughout the year. During each quarter, applicable taxpayers pay a portion of their expected annual income tax. As a result, these payments are estimations.
These regular tax payments are meant to cover Medicare, Social Security and your income tax. So, you should familiarize yourself with how those taxes break down: the income tax and the self-employment tax. Income tax follows the same income tax rates as salaried workers pay. Then, the self-employment tax clocks in at 15.3%. This covers both the Social Security and Medicare costs .
Fact #: Social Security Provides A Guaranteed Progressive Benefit That Keeps Up With Increases In The Cost Of Living
Social Security benefits are based on the earnings on which you pay Social Security payroll taxes. The higher your earnings , the higher your benefit.
Social Security benefits are progressive: they represent a higher proportion of a workers previous earnings for workers at lower earnings levels.
Social Security benefits are progressive: they represent a higher proportion of a workers previous earnings for workers at lower earnings levels. For example, benefits for a low earner retiring at age 65 in 2020 replace about half of their prior earnings. But benefits for a high earner replace about one-quarter of prior earnings, though they are larger in dollar terms than those for the low-wage worker.
Many employers have shifted from offering traditional defined-benefit pension plans, which guarantee a certain benefit level upon retirement, toward defined-contribution plans s), which pay a benefit based on a workers contributions and the rate of return they earn. Social Security, therefore, will be most workers only source of guaranteed retirement income that is not subject to investment risk or financial market fluctuations.
Once someone starts receiving Social Security, their benefits increase to keep pace with inflation, helping to ensure that people do not fall into poverty as they age. In contrast, most private pensions and annuities are not adjusted for inflation.
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Your Monthly Social Security Benefits Increase The Longer You Wait To Claim
You can collect Social Security benefits as soon as you turn 62, but taking benefits before your full retirement age means a permanent reduction in your payments of as much as 25% to 30%, depending on your full retirement age.
If you wait until you hit full retirement age to claim Social Security benefits, youll receive 100% of your earned benefits. But you can also get a big bonus by waiting to claim your Social Security benefits at age 70 your monthly Social Security benefit will grow by 8% a year until then. Any cost-of-living adjustments will be included, too, so you don’t forgo those by waiting.
Waiting to claim your Social Security benefits can help your heirs as well. By waiting to take her benefit, a high-earning wife, for example, can ensure that her low-earning husband will receive a much higher survivor benefit in the event she dies before him. That extra income of up to 32% could make a big difference.
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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Business Tax Deductions You Can Take
Self-employment taxes are assessed on your net income â meaning, your income after eligible business expenses have been deducted. So the best way to lower your tax bill is to lower your net income by deducting everything youâre spending on running your business.
Anyone self-employed can deduct business expenses: you donât need an LLC to claim these write-offs. Youâll fill out these expenses on your Schedule C, which self-employed people use to report their income and expenses. Some common business expenses for freelancers and gig workers include:
Will I Pay The Tax If I Continue Working After I Start Claiming Social Security
You may still be working when you begin drawing Social Security benefits. It may seem counterintuitive to continue paying the tax once you start taking benefits. However, you must pay the Social Security payroll tax as long as you earn wages or self-employment income that isn’t exempt from FICA or SECA taxes.
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Income Taxes And Your Social Security Benefit
Some of you have to pay federal income taxes on your Social Security benefits. This usually happens only if you have other substantial income in addition to your benefits .
You will pay tax on only 85 percent of your Social Security benefits, based on Internal Revenue Service rules. If you:
- file a federal tax return as an “individual” and your combined income* is
- between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
- more than $34,000, up to 85 percent of your benefits may be taxable.
State Taxes On Social Security
Thirteen states tax Social Security benefits in some cases. If you live in one of those statesColorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, or West Virginiacheck with your state tax agency. As with the federal tax, how these agencies tax Social Security varies by income and other criteria.
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Who Is Usually Classified As A 1099
Federal and state governments use different rules to determine whether someone should be classified as a 1099 employee.
The IRS uses these three basic categories to determine if an employee is an independent contractor:
- Behavioral control. The right of the employer to direct or control how you perform the work could make it less appropriate for them to classify you as an independent contractor. Your title or the allowance to choose your own hours isnt enough to free an employer from correct classification.
- Financial control. If youre paid on your own terms for example, after invoicing the employer investing in your own equipment and paying your own taxes, youre more likely to be classified as 1099.
- Relationships. If the business youre working for hires you on for an indefinite period without a contract, provides benefits and protection and considers your work a key aspect of the business, youre typically classified as a W-2 employee.
Every state has its own way of classifying independent contractors. Many use the ABC test to determine if an employee is an independent contractor:
- A: The worker is free from control and direction of the hiring entity.
- B: The worker performs work outside the employers scope of business
- C: The worker is customarily engaged in a similar trade, occupation or business similar to the hiring entitys.
Lost Or Stolen Federal Payments
Report your lost, missing, or stolen federal check to the agency that issued the payment. It’s usually one of these paying agencies. If your documentation indicates it’s a different agency, and you need its contact information, look in the A-Z Index of U.S. Government Departments and Agencies.
To get an update on your claim, contact the Treasury Department Philadelphia Financial Center at 1-855-868-0151, option 1.
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How Much Of Your Social Security Income Is Taxable
Social Security payments have been subject to taxation above certain income limits since 1983. No inflation adjustments have been made to those limits since then, so most people who receive Social Security benefits and have other sources of income pay some taxes on the benefits.
No taxpayer, regardless of income, has all of their Social Security benefits taxed. The top level is 85% of the total benefit. Heres how the Internal Revenue Service calculates how much is taxable:
- The calculation begins with your adjusted gross income from Social Security and all other sources. That may include wages, self-employed earnings, interest, dividends, required minimum distributions from qualified retirement accounts, and any other taxable income.
- Tax-exempt interest is then added.
- If that total exceeds the minimum taxable levels, then at least half of your Social Security benefits will be considered taxable income. You then have to take the standard deduction or itemize deductions to arrive at your net income. The amount that you owe depends on precisely where that number lands in the federal income tax tables.
Combined Income = your adjusted gross income + nontaxable interest + half of your Social Security benefits
Calculate Your Net Contractor Earnings
Independent contractors pay federal taxes on the net earnings they report on a Schedule C attachment not their gross earnings. Your net earnings are equal to the gross payments you receive less any contractor-related deductions you are eligible to claim. The Internal Revenue Service treats your contractor activities in the same way as a small business, and therefore, you are eligible to claim the same deductions that any business can.
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