Tax On Wages And Self
Benefits are funded by taxes imposed on wages of employees and self-employed persons. As explained below, in the case of employment, the employer and employee are each responsible for one half of the Social Security tax, with the employee’s half being withheld from the employee’s pay check. In the case of self-employed persons , the self-employed person is responsible for the entire amount of Social Security tax.
The portion of taxes collected from the employee for Social Security are referred to as “trust fund taxes” and the employer is required to remit them to the government. These taxes take priority over everything, and represent the only debts of a corporation or LLC that can impose personal liability upon its officers or managers. A sole proprietor and officers of a corporation and managers of an LLC can be held personally liable for non-payment of the income tax and social security taxes whether or not actually collected from the employee.
A separate payroll tax of 1.45% of an employee’s income is paid directly by the employer, and an additional 1.45% deducted from the employee’s paycheck, yielding a total tax rate of 2.90%. There is no maximum limit on this portion of the tax. This portion of the tax is used to fund the Medicare program, which is primarily responsible for providing health benefits to retirees.
The Social Security tax rates from 1937â2010 can be accessed on the Social Security Administration‘s website.
Wages not subject to tax
How Can You Maximize Your Own Benefits
For most older Americans thinking about claiming Social Security benefits, it’s too late to change your earnings record or to go back and earn more every year. But you can control both of the other two factors on this list you can make sure you’ve worked for at least 35 years prior to claiming benefits, and you can wait until 70 to claim them. Both of these steps can mean getting larger benefits, which can provide you with more financial security in your later years.
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Contrast With Private Pensions
Although Social Security is sometimes compared to private pensions, the two systems are different in a number of respects. It has been argued that Social Security is an insurance plan as opposed to a retirement plan. Unlike a pension, for example, Social Security pays disability benefits. A private pension fund accumulates the money paid into it, eventually using those reserves to pay pensions to the workers who contributed to the fund and a private system is not universal. Social Security cannot “prefund” by investing in marketable assets such as equities, because federal law prohibits it from investing in assets other than those backed by the U.S. government. As a result, its investments to date have been limited to special non-negotiable securities issued by the U.S. Treasury, although some argue that debt issued by the Federal National Mortgage Association and other quasi-governmental organizations could meet legal standards. Social Security cannot by law invest in private equities, although some other countries and some states permit their pension funds to invest in private equities. As a universal system, Social Security generally operates as a pipeline, through which current tax receipts from workers are used to pay current benefits to retirees, survivors, and the disabled. When there is an excess of taxes withheld over benefits paid, by law this excess is invested in Treasury securities as described above.
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Who Can Claim Benefits From My Record
Auxiliary benefits are divided into two categories: those that kick in before a workers death and those that go to the workers survivors. The second kind of benefits are often called survivor or Social Security death benefits. Here are the rules:
While youre alive, your spouse and any ex-spouse become eligible to claim spousal benefits from your record, beginning when they turn 62. In order for your husband or wife to claim Social Security spousal benefits you must have already claimed your primary benefits. Divorced spouses, though, can begin claiming benefits on their exs record whether or not the ex has filed for retirement benefits.
Minor children and disabled children of any age who became disabled before age 22 are also eligible to receive auxiliary benefits if their retired parent has started claiming primary benefits.
After a worker eligible for primary Social Security benefits dies, a few classes of protected individuals are entitled to claim auxiliary survivor benefits . The folks with this kind of Social Security eligibility include:
You Can Claim Social Security Benefits Earned By Your Ex
Just because you’re divorced doesn’t mean you’ve lost the ability to get a Social Security benefit based on your former spouse’s earnings record. You can receive a benefit based on his or her record instead of a benefit based on your own work record if you were married at least 10 years, you are 62 or older, and single.
Like a regular spousal benefit, you can get up to 50% of an ex-spouse’s benefit — less if you claim before full retirement age. And the beauty of it is that your ex never needs to know because you apply for the benefit directly through the Social Security Administration. Taking a benefit on your ex’s record has no effect on his or her benefit or the benefit of your ex’s new spouse. And unlike a regular spousal benefit, if your ex qualifies for benefits but has yet to apply, you can still take a benefit on the ex’s record if you have been divorced for at least two years.
Note: Ex-spouses can also take a survivor benefit if their ex has died after the divorce, and, like any survivor benefit, it will be worth up to 100% of what the ex-spouse received. If you remarry after age 60, you are still eligible for the survivor benefit.
A claiming strategy if youre divorced: Exes at full retirement age who were born on January 1, 1954, or earlier can apply to restrict their application to a spousal benefit while letting their own benefit grow.
How To File Social Security Income On Your Federal Taxes
Once you calculate the amount of your taxable Social Security income, you will need to enter that amount on your income tax form. Luckily, this part is easy. First, find the total amount of your benefits. This will be in box 3 of your Form SSA-1099. Then, on Form 1040, you will write the total amount of your Social Security benefits on line 5a and the taxable amount on line 5b.
Note that if you are filing or amending a tax return for the 2017 tax year or earlier, you will need to file with either Form 1040-A or 1040. The 2017 1040-EZ did not allow you to report Social Security income.
What If I Remarry
If you wait until age 60 to remarry , your new civil status wont affect your eligibility for survivor benefits. Again, lots of people leave money on the table by making big life decisions without consulting the Social Security cut-offs. Our advice: dont get remarried at age 59-and-11-months if you can wait until age 60!
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Social Security For Retirement
The biggest determinant of retirement benefit amount is lifetime earnings since the benefit is based largely on the average of a person’s 35 highest-earning years. Because the SS tax is regressive, in retirement, lower-income earners will have a higher portion of their SS retirement benefits paid out in relation to their lifetime earnings than higher-income earners. Another important determinant of benefit amount is the age at which a person applies for retirement benefits.
SS is designed to replace about 40% of the average American worker’s pre-retirement income. This value is dependent on each individual’s work history higher-income earners will receive larger SS checks than lower-income earners, but the check will be a smaller percentage of their pre-retirement income. SS is not intended to be a sole source of retirement income, and as such, it is advisable to have other forms of income in retirement. This can take the form of anything from rental property income to annuities, mutual funds, or even tax-shielded retirement plans such as a 401 and/or IRAs.
Full Retirement Age
Retirement Benefits While Working
When to Apply for Social Security Retirement Benefits
- The immediate need for cash
- Life expectancy
- Relative age, income, and health of spouse
Social Security Credits
Receiving Retirement Benefits Outside of the U.S.
Reduction For Disability Payments From Other Sources
If you receive disability benefits from a private source, like a private pension or private insurance benefits, these benefits will not affect your SSDI benefits. If, however, you receive other public disability benefits, they may affect your SSDI benefits. For instance, if you were injured on the job and are receiving workers’ compensation benefits, the amount of SSDI benefits you receive might be reduced.
Other disability benefits that are not job-related and are paid for by the federal, state, or local government may also reduce your SSDI benefit amount. Examples of these include temporary disability benefits paid by the state, military disability benefits, and state or local government retirement benefits that are based on disability. Some public benefits are not counted toward the 80%, including SSI or VA benefits.
The combined total amounts you receive from SSDI and all other public disability benefits cannot be more than 80% of the average amount you earned before you became disabled. If the amount is more than 80% of what your average earnings were before you became disabled, in most states, the excess amount is deducted from your SSDI benefits.
The interaction between workers’ compensation and SSDI can be complicated and varies depending on what state you live in. If you qualify for more than one public disability benefit, you may want to speak with an attorney to make sure you do not miss out on any benefits you are entitled to.
Earn The Maximum Taxable Earnings
Remember above where I said Social Security benefits are based on average wages? This doesn’t necessarily refer to all wages you earned. Only wages up to the annual “wage base limit” are subject to Social Security tax and only wages up to that threshold count toward determining your benefits.
For 2021, for example, the annual wage base limit is $142,000, but the limit changes from year to year. The limit creates a de facto cap on the amount of benefits you can receive. If your annual earnings meet or exceed the taxable maximum every year for 35 years, you’ll get the largest possible Social Security benefit that coveted $3,895 monthly check in 2021.
How Social Security Numbers Have Changed Over Time
Today the SSN is 9 numbers long, but before the system was created in 1936, there were a few different options. There was the option of the 9-digit number we have today, an 8-digit number that consisted of a 5 digital serial number with a 3 digit geographic indicator, and a 7-digit version which had 4 digits and 3 alphabetic characters.
For those born in the last few years, Social Security Numbers have changed. In 2007, the Social Security Administration said that it was going to change the previous method for giving out Social Security Numbers and go to a random process. This change went into effect in 2011.
Now, there is no longer geographical significance to the first three digits, and now they have begun using numbers never used before, like 900s.
Social Security For Spouses With Dependent Children Under 16
There is an exception to the general rule that you have to be 62 to claim Social Security spousal benefits, and thats when there are dependent children in the home. These days, more couples are having children later in life and the rates of divorce and remarriage among adults age 55 and older have grown significantly. Not to mention, more and more grandparents are finding themselves raising their grandchildren. Which means its possible to have dependent children who qualify for benefits on you or your spouses Social Security record.
If those children are under age 16, it’s possible for the children to each receive benefits until they reach age 18 and graduate from high school. Its also possible for you to qualify for spousal benefits, even if youre younger than age 62. The rules in this scenario, however, are a bit different, including a maximum family benefit.
If you are younger than age 62 and claim spousal benefits while caring for a child under 16, you won’t be subject to a reduction in spousal benefits for as long as that child is younger than 16. However, the spousal benefits will go away when the child reaches age 16 and keep in mind the amount of the spousal benefit will be subject to maximum family benefit rules. The maximum family benefit amount varies between 150% and 188% of the workers benefits, depending on a complex formula calculated by the Social Security Administration.
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That’s it. Non-citizens, felons, and spouses who didn’t work can all qualify for Social Security as long as they meet those three requirements. The third is a rare category but, for example, it would disqualify someone from getting survivor’s benefits after killing their spouse or someone who gained their work credits fraudulently.
The third category also means those undocumented immigrants, even though many pay Social Security taxes, cannot collect benefits unless they are considered a “qualified alien.”
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Social Security Calculation Step : Adjust All Earnings For Inflation
So lets jump in with calculating your AIME. To do this, youll need to get use a notepad or a tool like Excel/Google Sheets.
Youre going to need six individual columns with plenty of room underneath for your information. Set up your columns with the following headings: Year, Age, Actual Earnings, Indexing Factor, Indexed Earnings, Highest 35 Years.
The first two headings are the year and your age. Go all the way back to the first year you had earnings that were taxed for Social Security. You can find a complete record of this by going to your online SSA account and click the link that says view earnings record. If you dont have an online account, its very easy to set one up.
This may seem a little redundant to put the year and your age, but itll make another step a little easier.
Now you just need to copy down the information from the SS earnings history. Youll want to use the part that says your taxed Social Security earnings. Dont skip a year, even if there were no earnings. Just put a zero in.
Once you have all of your historical earnings recorded, its time to adjust them for inflation. The SSA uses an indexing factor to make sure your future benefit has kept up with inflation, but still based on your earnings.
Important note hereonly your earnings through age 59 are indexed. All earnings at age 60 and beyond are used in the calculation at face value with no inflation adjustment applied.
Medicare Part B Premiums
While the cost-of-living adjustment usually goes up every year, so do the Medicare Part B premiums that seniors pay for physician and outpatient services. Part B premium payments are often deducted directly from Social Security beneficiaries’ monthly benefit checks.
Exactly how much someone pays for Medicare Part B depends on their income. In 2021, the monthly premium is $148.50 for single individuals with up to $88,000 in income and married couples with up to $176,000. But those monthly premiums can be as high as $504.90 per month for high earners.
From 2000 to 2020, Social Security benefits had an average annual increase of 2.2%, while Medicare Part B premiums went up by 5.9%.
In a single year, the benefit reduction due to Medicare Part B premiums may be minimal, according to the Center for Retirement Research. But over time, it widens.
For example, in 30 years, the average total benefit could hypothetically grow by 89% to $3,600, up from $1,900, according to the Center for Retirement Research’s calculations. But once Medicare Part B premiums are included, net benefits would rise by just 60% to $2,800, from $1,750.
“There is this increase in the benefit, but because it’s eroded by Medicare premiums, it’s not nearly fast enough to keep up with what inflation would be,” Hubbard said.
Of note, one rule called the hold harmless provision protects many Social Security beneficiaries from having their benefit payments reduced due to higher Medicare premiums.
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