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.
What If I Withheld Too Much
If you deducted too much tax from an employees pay, either for Social Security or for Medicare tax, you may have several things to fix:
- Refund the employee. You will need to pay the employee back for the excess deduction amount. You can give this amount back to the employee in a paycheck or as a separate check. Be sure you dont deduct Social Security from this check!
- File a Corrected 941. If the mistake was included in Form 941 report, you will need to file a correction form to receive a refund.
- Change the employees payroll record. Deduct the over-payment of Social Security taxes from the employees payroll tax record. The W-2 Form for an employee who earns more than $106,800 should show the total amount of pay earned for the year and the total Social Security wages as $106,800. Medicare wages will be the same as the total amount of pay.
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What If An Employer Withholds Too Much Fica Tax From An Employees Pay
If you over-withhold FICA from an employees pay, you should take steps to correct the problem. Here are the options:
- Refund the excess withholding to the employee. This can be done by taking out less from the employees paycheck to offset the excess withholding. This is usually a good option.
- File a claim with the IRS to recoup the excess payment. This may be necessary if the employee is no longer on your payroll and there are no other options to adjust future withholding.
Use Form 941-X, Adjusted Employers Quarterly Federal Tax Return or Claim for Refund, or Form 944-X, Adjusted Employers Annual Federal Tax Return or Claim for Refund to make the make an adjustment in withholding or a claim for refund. If you do nothing, the employee can claim the excess payment as a tax credit on an income tax return.
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Social Security And Fica
Most employees and employers each pay Social Security and Medicare taxes on Social Security and Medicare covered wages. These taxes comprise FICA .
Social Security Portion of FICA
- The Social Security portion of FICA is 6.2% of the maximum taxable wages.
- If you reach the maximum payment, you do not pay any more Social Security tax until the next calendar year.
- The maximum taxable wage for Social Security is adjusted each year. Visit Social Security Administration site to learn more about your Social Security Contribution and Benefit Base.
Medicare Portion of FICA
- The Medicare portion of FICA is 1.45% for wages up to 200,000 and 2.35% for wages above $200,000.
- There is no cap on wages for the Medicare portion of FICA.
Find out about FICA Refunds as a result of the Doctors Council v. NYCERS court decision.
What Is The Medicare Tax Rate For 2021
The Medicare tax rate is 1.45%. But the Federal Insurance Contributions Act tax combines two rates. FICA taxes include both the Social Security Administration tax rate of 6.2% and the Medicare tax rate.
Thus, the total FICA tax rate is 7.65%. The maximum Social Security tax amount for both employees and employers is $8,239.80. For self-employed people, the maximum Social Security tax is $16,479.60. Anyone who earns wages over $200,000 will need to pay an extra 0.9% Medicare tax.
Employers arent responsible for this additional fee. The charge is withheld from the employees wages only. The self-employment tax rate is slightly higher, at 15.3%. Both the Social Security tax rate of 12.4% and the 2.9% Medicare tax rate contribute to this figure.
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When You Claim Matters
If you claim your Social Security benefits before your FRA, or full retirement age , you will end up with a permanently reduced monthly benefit because of the early age. If you claim at the earliest possible age of 62, your monthly checks could be up to 30% less than at your FRA.1
There will also be an earnings test until you reach that FRA: If you have earned income in excess of $19,560 in 2022, your benefits will be reduced by $1 for every $2 of earned income over the limit.
In the year of reaching your FRA, the earnings test limit is $51,960 in 2022, and your benefits will be reduced by $1 for every $3 of earned income over the limit.
These benefits are not truly “lost,” however. If your benefits have been reduced due to earning, your monthly Social Security check will be increased after your FRA to account for benefits withheld earlier due to excess earnings. Note that “earned” income includes wages, net earnings from self-employment, bonuses, vacation pay, and commissions earnedbecause they’re all based upon employment. Earned income does not include investment income, pension payments, government retirement income, military pension payments, or similar types of “unearned” income.
Once you reach your FRA, there is no earnings test and no benefit reductions based on earned income.
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Determining If You’ll Owe Social Security Benefit Taxes
The Social Security Administration sets the following thresholds when calculating Social Security benefit taxes based on your combined income and tax filing status:
More than $34,000
Source: Social Security Administration. Married Filing Separately column assumes you lived with your spouse at any point during the year. If this is not true, refer to the All Other Tax Filing Statuses column.
If you fall into the 0% taxation range for your tax filing status, you won’t have to worry about paying any taxes on your benefits at all. If you land above this range, you will owe taxes on your benefits and you can figure out how much using the formula below.
Things are a little trickier for married couples filing separately than for other tax filing statuses. If you lived together at any point during the year, you will owe taxes on up to 85% of your benefits, regardless of your combined income. But if you didn’t live together at all, you’re subject to the same taxation rules as individuals, heads of household, and qualifying widows.
Calculating Your Social Security Income Tax
If your Social Security income is taxable, the amount you pay in tax will depend on your total combined retirement income. However, you will never pay taxes on more than 85% of your Social Security income. If you file as an individual with a total income thats less than $25,000, you wont have to pay taxes on your Social Security benefits in 2021, according to the Social Security Administration.
For the 2021 tax year, single filers with a combined income of $25,000 to $34,000 must pay income taxes on up to 50% of their Social Security benefits. If your combined income was more than $34,000, you will pay taxes on up to 85% of your Social Security benefits.
For married couples filing jointly, you will pay taxes on up to 50% of your Social Security income if you have a combined income of $32,000 to $44,000. If you have a combined income of more than $44,000, you can expect to pay taxes on up to 85% of your Social Security benefits.
If 50% of your benefits are subject to tax, the exact amount you include in your taxable income will be the lesser of either a) half of your annual Social Security benefits or b) half of the difference between your combined income and the IRS base amount.
The example above is for someone who is paying taxes on 50% of his or her Social Security benefits. Things get more complicated if youre paying taxes on 85% of your benefits. However, the IRS helps taxpayers by offering software and a worksheet to calculate Social Security tax liability.
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Is My Social Security Income Taxable The Quick Answer
According to the IRS, the quick way to see if you will pay taxes on your Social Security income is to take one half of your Social Security benefits and add that amount to all your other income, including tax-exempt interest. This number is known as your combined income .
If your combined income is above a certain limit , you will need to pay at least some tax.
The limit is $25,000 if you are a single filer, head of household or qualifying widow or widower with a dependent child. The limit for joint filers is $32,000. If you are married filing separately, you will likely have to pay taxes on your Social Security income.
Calculating Your Combined Income
Your combined income determines whether or not you owe taxes on your Social Security benefits. You can calculate yours by adding up:
Your AGI is your annual income minus certain tax deductions, like tax-deferred retirement contributions. Married couples filing jointly must consider both partners’ incomes and deductions. If you have municipal bonds or some tax-exempt savings bonds, you might also have nontaxable interest. Calculating half of your annual Social Security benefits is pretty straightforward. You can create a my Social Security account if you’re not sure how much you’re set to receive in benefits.
So someone with an AGI of $25,000 with $2,000 in nontaxable interest and $14,000 in annual Social Security benefits would have a combined income of $34,000 .
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How To Pay Taxes On Social Security
If you owe taxes on your Social Security income, you can pay them in a few ways. First, you can pay them each Tax Day, just as you paid taxes when you were younger. You may also consider paying estimated taxes quarterly if you expect you may owe taxes.
Alternatively, if you expect your Social Security benefits to be taxable, you may want to withhold federal taxes from your payments, just like you did from your paycheck when you were working.
What Do Payroll Taxes Fund
In the United States, payroll taxes are social security and medicare taxes. This means federal payroll taxes are used to fund social security and medicare programs across the country. This is intended to ensure a basic level of medical care and social support in old age, disability and various other cases.
Note, in the United States payment of medicare and social security taxes does not negate the need for comprehensive health insurance.
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Reportable Social Security Benefits
Iowa does not tax Social Security benefits. While Social Security benefits are excluded from income when computing tax, some Social Security benefits are included as income in determining whether a taxpayer has sufficient income to file an Iowa return, and are included as income for purposes of computing the alternate tax on line 39. NOTE: This also affects you if you are single and use the Tax Reduction Worksheet. The reportable Social Security benefit is calculated using the worksheet below and entered on Step 4 of the IA 1040.
Eight : Take Other Deductions
You’re not quite done yet with deductions. Here are some other possible deductions from employee pay you might need to calculate:
- Deductions for employee contributions to health plan coverage
- Deductions for 401 or other retirement plan contributions
- Deductions for contributions to internal company funds or charitable donations.
Remember, all deductions start with and are based on gross pay.
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Contributing To Retirement Accounts
Another key advantage of ongoing earned income even after you collect Social Security is that you can keeping contributing to your retirement savings accounts like traditional IRAs, health savings accounts , Roth IRAs, and 401s.
Note: If you are over 72, you will have to take the required minimum distribution from your traditional IRA, except for during the 2020 pause because of COVID-19.
Your traditional 401, or similar employer-based retirement plan, is a different story. In general, you can continue stashing away money in your current employer-provided plan as long as you’re still working, even part-time, and you can delay taking your RMD until after you retire.
This additional savings can help, especially if your savings are running a bit behind your goals. The combination of the added savings, tax-deferred growth potential, and the ability to defer tapping into your savings can be powerful, even at the end of your working career.
State Taxation Of Social Security Benefits
In addition to federal taxes, some states tax Social Security benefits, too. The methods and extent to which states tax benefits vary. For example, New Mexico treats Social Security benefits the same way as the federal government. On the other hand, some states tax Social Security benefits only if income exceeds a specified threshold amount. Nebraska, for instance, taxes Social Security benefits only if your income is at least $43,000, or $58,000 if you’re married filing a joint return. Utah includes Social Security benefits in taxable income but allows a tax credit for a portion of the benefits subject to tax.
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.
Three Ways To Reduce The Taxes That You Pay On Benefits
Is Social Security taxable? For most Americans, it is. That is, a majority of those who receive Social Security benefits pay income tax on up to half or even 85% of that money, because their combined income from Social Security and other sources pushes them above the very low thresholds for taxes to kick in.
But you can use some strategies, before and after you retire, to limit the amount of tax that you pay on Social Security benefits. Keep reading to find out what you can do, starting today, to minimize the amount of income tax that you pay after retiring.
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Making Your Tax Payments
Because youre self-employed, youll be expected to pay estimated taxes each quarter, as well as filing your annual return. Your quarterly estimated tax payments should include amounts to cover both your Social Security and Medicare tax obligations, as well as your estimated income tax bill. You can estimate the taxes due using the previous years return as long as you pay estimated taxes at least equal to your previous years tax obligation, you shouldnt owe any penalties. Estimated taxes are filed using Form 1040ESEstimated Tax for Individuals. This form includes vouchers that you can print off and use to mail in your estimated tax payments throughout the year. You can also pay your taxes online with the Electronic Federal Tax Payment System, provided by the IRS.
As the year progresses, you need to make sure that your actual earnings match the projections you made in determining your estimated tax obligation. If youre making less than you anticipated, and hence overpaying estimated taxes, then generally the government wants you to continue making the payments as you predicted. But if youre making much more than you projected, you must make arrangements to make up the difference as soon as possible. Even if you make quarterly payments, you could be penalized if you pay less than 90 percent of the current years earnings and you also pay less than 100 percent of last years earnings.