How Could Your Years Of Work Affect Your Social Security Benefits
To understand how working longer helps max out your benefits, let’s consider a simple example. For purposes of this example, it’s important to know that the Social Security Administration multiplies your wages in each year you worked by an indexing factor to get your inflation-adjusted wage. You can learn about this process in our guide to how your work history affects your Social Security benefits, but you don’t need to know more than that to understand this example.
For our example, let’s consider the hypothetical earnings record of a woman named Ann who turned 62 in 2019.
Table source for Indexing Factors: Social Security Administration.
In total, Ann has 39 years of work history. Since the SSA only counts the 35 years you earned the most, the SSA would remove those lowest-earning four years from determining the AIME — in this case, that happens to be the first four years. This is beneficial, because Ann didn’t earn much in those years, even after adjusting for wage growth. Given this information, the SSA would calculate an AIME of $5,130.02.
Now, remember, the SSA uses a specific formula to figure out benefits based on AIME. Using this formula, Ann’s primary insurance amount is the total of
- 90% of AIME up to a first bend point set the year she turns 62
- 32% of AIME on the amount between the first and second bend points, and
- 15% of AIME above the second bend point
Based on Ann’s AIME, that breaks down as:
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.
How Work Affects Your Benefits
If youre working, receiving Social Security benefits, and youre younger than full retirement age, your earnings may reduce your benefit amount.
In 2020, for instance, the Social Security Administration will deduct $1 from benefits for each $2 earned over $18,240.
The earnings limit for people turning 66 in 2020, however, will increase to $48,600 and the SSA will deduct $1 from benefits for each $3 earned over $48,600 until the month the worker turns age 66. FRA is 66 for people born between 1943 and 1954. Beginning with 1955, two months are added for every birth year until the full retirement age reaches 67 for people born in 1960 or later.
One positive here: Theres no limit on earnings for workers who are FRA or older for the entire year.
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Social Security And Medicare Withholding Rates
The current tax rate for social security is 6.2% for the employer and 6.2% for the employee, or 12.4% total. The current rate for Medicare is 1.45% for the employer and 1.45% for the employee, or 2.9% total. Refer to Publication 15, , Employers Tax Guide for more information; or Publication 51, , Agricultural Employers Tax Guide for agricultural employers. Refer to Notice 2020-65 and Notice 2021-11 for information allowing employers to defer withholding and payment of the employees share of Social Security taxes of certain employees.
Brief History Of Social Security
The Social Security program was created by the Social Security Act that President Franklin D. Roosevelt signed into law in 1935. The first checks went out in 1940. Originally it paid benefits only to workers 65 and older, but in the 1970s the government altered it to allow workers to claim benefits as early as 62. It also instituted annual cost-of-living adjustments to help Social Security keep pace with inflation.
The program has worked fairly well so far, but many people fear for the future, when there will be fewer workers to support a greater number of Social Security recipients. The latest Social Security Trustees Report indicates the programs trust funds would be depleted by 2035, after which it would be able to pay out only about 76% of benefits to retirees and about 92% to disabled workers.
The government has proposed several possible solutions for ensuring the long-term sustainability of the program, but at present no plans have been set. Theres no risk of the program disappearing in the next decade or two, but its possible future benefits may not go as far as they do today. Thats why todays workers need to prioritize their personal retirement savings, so they can cover most of their expenses on their own.
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Getting A Social Security Number For A New Baby
The easiest way to get a Social Security number for your child is at the hospital after they are born when you apply for your childs birth certificate. If you wait to apply for a number at a Social Security office, there may be delays while SSA verifies your childs birth certificate.
;Your child will need their own Social Security number so you can:
- Claim your child as a dependent on your income tax return
- Open a bank account in their name
- Get medical coverage for them
- Apply for government services for them
Keep your Social Security card in a safe place to protect yourself from identity theft.;
Beware The Social Security Earnings Test
Bringing in too much money in earned income can cost you if you continue to work after claiming Social Security benefits early. With what is commonly known as the Social Security earnings test, you will forfeit $1 in benefits for every $2 you make over the earnings limit, which in 2021 is $18,960. Once you are past full retirement age, the earnings test disappears, and you can make as much money as you want with no impact on benefits.
Any Social Security benefits forfeited to the earnings test are not lost forever. At your full retirement age, the Social Security Administration will recalculate your benefits to take into account benefits lost to the test. For example, if you claim benefits at 62 and over the next four years lose one full years worth of benefits to the earnings test, at a full retirement age of 66 your benefits will be recomputed — and increased — as if you had taken benefits three years early, instead of four. That basically means the lifetime reduction in benefits would be 20% rather than 25%.
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How Is Social Security Funded
Its called a contribution, like something youd voluntarily give to charity, but with FICA, you have no choice in the matter. By law, employers must deduct FICA taxes from their weekly payroll.
In 2020, federal payroll taxes generated $1.24 trillion or 5.9% of the gross domestic product . That $1.24 trillion accounted for 35.9% of all the federal revenues.
More than 85% of Social Security funding comes from payroll taxes. The other sources of funding are interest earned on the assets in the Social Security trust fund ; taxes on Social Security benefit ; and reimbursements from the General Fund, which amount to zero.
Qualifying For Social Security Benefits
Anyone born in 1929 or later needs 40 Social Security work credits, the equivalent of 10 years of work, to qualify for Social Security benefits. For every quarter that you earn at least;$1,470 in 2021 , you earn one credit. The number changes annually.
Even if your business isnt particularly successful, or you only work part-time or occasionally, its not difficult to earn the Social Security credits you need. In fact, even if your earnings fall below this threshold or if your business has a loss, there are some alternative ways to earn Social Security credits. These optional methods may increase the amount of self-employment tax you owe, but theyll help you get the work credits you need.;
Your eventual benefit payments do take your earnings into account. If you never earned much money from a lifetime of self-employment, dont count on getting a large Social Security check in retirement. If you started claiming benefits this year, for example, and your average monthly earnings worked out to just $800, your monthly Social Security retirement benefit would be $720assuming youre at full retirement age. Thats not much, but if you managed to get by on an average of $800 a month during your working years, you could probably work with a monthly benefit payment of $720 in retirement.;
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How Is Social Security Financed
Social Security is financed through a dedicated payroll tax. Employers and employees each pay 6.2 percent of wages up to the taxable maximum of $142,800 , while the self-employed pay 12.4 percent.
In 2020, $1.001 trillion of total Old-Age and Survivors Insurance and Disability Insurance income came from payroll taxes. The remainder was provided by interest earnings $76 billion and revenue from taxation of OASDI benefits $41 billion .
The payroll tax rates are set by law, and for OASI and DI, apply to earnings up to a certain amount. This amount, called the earnings base, rises as average wages increase.
Tax rates for employees and employers each under current law
Check The Social Security Administration’s Math
Your statement includes a record of the earnings on which you’ve paid taxes and an estimate of the benefits you will receive at various retirement ages: 62, 67, and 70. It is always wise for you to check the SSA’s numbers. Don’t be surprised if you uncover an error. Some government-watchers estimate that the SSA makes mistakes on at least 3% of the total official earnings records it keeps.
When you check your record, make sure that the Social Security number noted on your earnings statement is your own, and make sure the earned income amounts listed on the agency’s records mesh with your own records of earnings as listed on your income tax forms or pay stubs.
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Maximum Taxable Income Amount For Social Security
Updated: by Financial Samurai
FICA stands for Federal Insurance Contributions Act and consists of a Social Security tax and a Medicare tax. This tax is very important for everyone to understand because so often we only think about federal tax rates and state income tax rates. The FICA tax is a big percentage of your total tax bill, especially for those making under six figures a year.
When I was making big bucks in finance, the tax bill was equally big bucks. The only saving grace was seeing my after-tax paycheck increase after the maximum taxable income threshold for Social Security was breached each year.
The tax amounts were jolting based on how inefficient the government was and still is with regards to;spending our money.
Children Can Collect Social Security Benefits Too
Minor children of Social Security beneficiaries can be eligible for benefits. Children up to age 18 and disabled children older than 18 may be able to receive up to half of a parent’s Social Security benefit. The disability must have occurred before the age of 22. As long as the disability prevents the person from working, the adult child can continue collecting the benefit even after the parent has died.
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Will You Get The Maximum Social Security Benefit If You Work A Long Time
The absolute maximum that a 70-year-old retiring in 2019 can receive is $3,770 per month in Social Security benefits. Even if you follow all the tips above, you might not receive this absolute max. That’s because this maximum is based on earnings equal to or exceeding the Social Security wage base limit for at least 35 years of your working life.
The Social Security Wage base limit is the maximum earnings subject to Social Security tax each year. High earners don’t pay Social Security tax on the entire amount of wages they earn, nor do they get credit for the full amount of their wages when AIME is determined. If workers paid taxes — and received benefits — on an unlimited amount of wages, million-dollar earners would have very high Social Security benefits. But there is a cap by law that limits the wages subject to tax and counted in the Social Security benefits formula.
The table below shows the wage base limit in recent years:
Table source: Social Security Administration.
The Social Security Administration has a table of the wage base limit going all the way back to 1937. If you did not earn at least that amount for each year that counts toward determining your AIME, you will not be able to earn the absolute maximum Social Security benefit — no matter how many years you work or how high your salary is at various points in your career.
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.
B What Jurisdictional Rules Are Used
There is no required international set of provisions deciding the jurisdictional limits of social security schemes. Principles and practice have been developed through the activities of the ILO and ISSA, but these amount to best practice only. The adoption of an international approach to coordination of schemes has occurred only in the European Economic Area , as addressed in detail below. The steps taken in the EEA are important because they follow the forms of best practice accepted more generally. Aside possibly from nondiscrimination provisions, double taxation conventions do not apply to social security contributions.154
1. Nationally Determined Limits
Each scheme establishes its own jurisdictional coverage. For reasons set out previously, the rules for jurisdictional coverage may reflect the jurisdictional rules adopted by the state to define when an individual is employed within the jurisdiction of the state and when the employees employer is within the state. For employees, the individual must be within the jurisdictional reach of the state for any rules applied by the state to operate realistically. This is because, without international agreements, the contribution authorities are unlikely to have either information or powers to enforce contribution liability beyond the territory covered by the national laws. Absent specific agreements, there are no information powers equivalent to those on which tax authorities rely.155
2. Specific Problems
Retire Now Claim Later
You can always take early retirement and still wait until later to begin your Social Security benefits. That is a particularly important strategy for married couples who want to make sure the;surviving spouse gets a larger benefit later in life.
The highest monthly benefit between you and your spouse is what will become the survivor benefit amount when one of you passesat that point, you’ll only get that higher benefit amount, not both amounts.
For the purpose of maximizing your future survivor benefit, you may want to plan for the higher earner between the two of you to delay the start of benefits to age 70 if possible. The lower earner, however, may want to start their benefits at an earlier age.
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Determining Your Social Security Benefits
To qualify to receive Social Security benefits later, youll need to accrue at least 40 Social Security credits.
You can earn up to four credits each year depending on how much money you make. In 2019, you have to make at least $5,440 to qualify for the full four credits. As a result, youll need to work at least 10 years before you qualify for Social Security benefits when you retire.
There are special rules for people with disabilities and surviving family members of someone who passed away which may allow them to collect Social Security without the forty-credit requirement.
Once you qualify, the amount youll receive each month depends on:
- Your average monthly income during your 35 best earning years. Only income thats subject to Social Security taxes counts.
- When you choose to start receiving Social Security benefits.
You can read more in-depth explanations about the calculations in this PDF from the Social Security Administration, and use the quick calculator to estimate how much youll receive in Social Security benefits based on different scenarios.
As a small business owner, one of the most important things to keep in mind is that only your income thats subject to Social Security taxes counts toward these benefits calculations.
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