How Are Social Security Taxes Calculated

A Formula For Determining Taxable Social Security

Many people and financial planning software programs assume that singles with over $34,000 of income or married couples with over $44,000 of income will have 85% of their Social Security benefit taxed, but that isn’t always the case. You can use the worksheet in IRS Publication 915, fill out a 1040, or use this formula to calculate the taxable portion of Social Security benefits.

Step 1: Determine Provisional Income

Step 2: Subtract the first threshold and multiply by .5.

Step 3: Subtract the second threshold and multiply by .35.

Step 4:Add them up.

Step 5: Calculate and apply the maximum.

Example

These clients are married, filing jointly, and have $75,000 of total income. None of it is tax-free . The IRA withdrawals alone are well over the second threshold.

State Taxes On Social Security Benefits

Everything weve discussed above is about your federal income taxes. Depending on where you live, you may also have to pay state income taxes.

There are 12 states that collect taxes on at least some Social Security income. Two of those states follow the same taxation rules as the federal government. So if you live in one of those two states then you will pay the states regular income tax rates on all of your taxable benefits .

The other states also follow the federal rules but offer deductions or exemptions based on your age or income. So in those nine states, you likely wont pay tax on the full taxable amount.

The other 38 states do not tax Social Security income.

Are Social Security Benefits Taxable

If you have a lot of income from other sources, up to 85% of your Social Security benefits will be considered taxable income. If the combination of your Social Security benefits and other income is below $25,000, your benefits wonât be taxed at all. The amount of your benefits that is subject to taxes is calculated on a sliding scale based on your income. Money that Social Security recipients pay in income taxes on their benefits goes back into funding Social Security and Medicare.

If your retirement income is high enough that your benefits are taxable, how do you pay those benefits? You can ask Social Security for an IRS Voluntary Withholding Request Form if youâd like the government to withhold taxes from your Social Security benefits. Otherwise, youâre expected to file quarterly tax returns to pay these taxes over the course of the year.

That covers federal income taxes. What about state income taxes? That depends. In 12 states, your Social Security benefits will be taxed as income, either in whole or in part the remaining states do not tax Social Security income.

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Fica Tax Withholding Rates

There are two different rate components:

• The Social Security withholding rate is gross pay times 6.2% up to that year’s Social Security income cap. This is your portion of the Social Security payment. The employer pays 6.2% with no limit.
• The Medicare withholding rate is gross pay times 1.45%, although high-income individuals will pay an additional 0.9%. The employer also pays 1.45% with no limit, but they don’t pay any additional tax.

The total withheld is 7.65% of your gross pay .

How Contributions Are Calculated

The FICA tax is your contribution to Social Security and Medicare as a percentage of your salary:

If you’re an employee, then you pay one half of this total your employer pays the other half for you .If you’re self-employed, then you pay the whole total yourself as Self-Employment tax, and then get a tax deduction on half of it as an “adjustment” on your tax return.

Now here’s where it gets a little confusing.What the previous paragraph shows is that being self-employed is like being an employee, but at a lower salary – lower by the FICA “half” that employers pay for their employees.And so, if you’re self-employed, you don’t have to pay FICA on all your salary, just on 92.35% of it.

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Example Of Social Security Taxation

Let’s say a single, 68-year-old retired woman, Susan, receives a Social Security benefit totaling $18,000 for 2021.

Susan collected $30,000 from other means throughout the year, so her provisional income is $39,000 .

Then, 85% of Susan’s total Social Security benefit, $15,300, is subject to federal income tax.

If you collect Social Security and anticipate you’ll need to pay federal taxes on your benefit, you can make estimated quarterly payments or elect to have federal taxes withheld either 7%, 10%, 12%, or 22% of your monthly benefit. You can also have additional taxes withheld from your other income sources, such as a pension.

Important: The following states also tax federal Social Security benefits, according to AARP: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia.

Social Security benefits for retirees, beneficiaries, and disabled people are considered a form of income by the IRS. But only a portion is subject to taxation 15% of your total benefit for the year is always tax free.

If your income for the year is more than $34,000, or more than $44,000 if you’re married, then you can expect to pay income taxes on most of the benefits you collected.

If you’d prefer to pay taxes as you go to avoid a large bill during tax season, opt in to withholding by filling out the form and returning it to your local Social Security office by mail or in person.

Should I Claim Social Security Earlier Than Planned To Take Advantage Of This Cola

In a word, no. If you are 62 and over, you will benefit from this COLA regardless of whether you have claimed your benefits or not. Thats because, starting the year you turn 62, the COLA is applied to your Primary Insurance Amount , the amount you would receive if you claim at your full retirement age, which is 67 for those born in 1960 or later. It doesnt matter if youre collectingyou still get it applied, said Martha Shedden, president and co-founder of the National Association of Registered Social Security Analysts.

If you claim before your full retirement age, your benefits will be reduced, but theyll be reduced off a higher base thanks to the COLA. If you claim beyond full retirement age, your benefits will be boosted off their higher base by delayed retirement credits. Its still good to wait, Shedden said.

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Is Social Security Taxable

Social Security income is generally taxable at the federal level, though whether or not you have to pay taxes on your Social Security benefits depends on your income level. If you have other sources of retirement income, such as a 401 or a part-time job, then you should expect to pay some income taxes on your Social Security benefits. If you rely exclusively on your Social Security checks, though, you probably wont pay taxes on your benefits. State taxes on Social Security, on the other hand, vary from state to state. Regardless, it can be helpful to work with a financial advisor who can help you understand how different sources of retirement income are taxed.

I Thought The 2023 Cola Was Going To Be In The Double Digits What Gives

The COLA is based on a calculation that compares the average consumer-price index from the third quarter of 2022 with data from the same period last year. The index thats used in the calculation is the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W.

High CPI-W readings over the summer led to an earlier COLA estimate of 10.5%. Johnson calculated that estimate based on the most current consumer-price data available at the time. Gas prices have since fallen, leading to the lower COLA, Johnson said.

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Uncle Sam Can Tax Up To 85% Of Your Social Security Benefits If You Have Other Sources Of Income Such As Earnings From Work Or Withdrawals From Tax

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Many people are surprised to learn that Social Security benefits can be taxed. After all, why is the government sending you a payment one day and asking for some of it back the next? But if you take a closer look at how the federal tax on Social Security is calculated, you’ll see that many people actually don’t pay any tax on their Social Security benefits.

• How 13 Types of Retirement Income Get Taxed

There’s no federal income tax on Social Security benefits for most people who only have income from Social Security. Thanks to the highest cost-of-living adjustment in 40 years, the average monthly Social Security check for a retired worker in 2022 is $1,658, which comes to $19,896 per year. That’s well below the minimum amount for taxability at the federal level.

On the other hand, if you do have other taxable income such as from a job, a pension or a traditional IRA then there’s a much better chance that Uncle Sam will take a 50% or 85% bite out of your Social Security check. Plus, depending on where you live, your state might tax a portion of your Social Security benefits, too.

payments sent by the Social Security Administration are not taxable.)

History Of Social Security Tax Rates

The Social Security tax began in 1937. At that time, the employee rate was 1%. It has steadily risen over the years, reaching 3% in 1960 and 5% in 1978. In 1990, the employee portion increased from 6.06 to 6.2% but has held steady ever sincewith the exception of 2011 and 2012.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 reduced the contribution percentage to 4.2% for employees for those years employers were still required to pay the full amount of their contributions.

The tax cap has existed since the inception of the program in 1937 and remained at $3,000 until the Social Security Amendments Act of 1950. It was then raised to $3,600 with expanded benefits and coverage. Additional increases in the tax cap in 1955, 1959, and 1965 were designed to address the difference in benefits between low-wage and high-wage earners.

The Social Security tax policy in the 1970s saw a number of proposed amendments and re-evaluations. The Nixon Administration was paramount in arguing that tax cap increases needed to correlate with changes in the national average wage index in order to address benefit levels for individuals in different tax brackets. The 1972 Social Security Amendments Act had to be revamped due to problems with the benefits formula that caused financing concerns. A 1977 amendment resolved the financial shortfall and established a tax cap increase structure that correlated with average wage increases.

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States That Tax Social Security Benefits

The above calculations are for federal taxes on your Social Security benefits, but the following 13 states also tax benefits:

All of these states have their own formulas for taxing benefits. Check with your state Department of Revenue to figure out how much of your Social Security benefits you might owe state taxes on. Fortunately for residents of West Virginia, its government is beginning to phase out Social Security benefit taxes, and by 2022 it won’t tax Social Security benefits at all anymore.

How Will Changing Employers Affect My Limit

In general, when you change employers, your prior Social Security wages will not be considered with your new employer. You will start all over again for Social Security limits. This is because employers match Social Security taxes , and your new employer is expected to match up to $7,886.40 in taxes. While you may have Social Security taxes taken in excess of your limit, you can claim a refund of Social Security taxes paid over $7,886.40 in 2017 on your personal income tax return.

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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.

Who Is Eligible For Social Security Benefits

Anyone who pays into Social Security for at least 40 calendar quarters is eligible for retirement benefits based on their earnings record. You are eligible for your full benefits once you reach full retirement age, which is either 66 and 67, depending on when you were born. But if you claim later than that – you can put it off as late as age 70 – youâll get a credit for doing so, with larger monthly benefits. Conversely, you can claim as early as age 62, but taking benefits before your full retirement age will result in the Social Security Administration docking your monthly benefits.

The bottom line: Youâre eligible for Social Security Benefits if youâve paid into the system for at least a decade, but your actual benefits will depend on what age â between 62 and 70 â you begin to claim them.

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Planning Around The Taxability Of Social Security Benefits

Planning strategies should be done based on marginal tax rates, which means the leaps in marginal tax rates from including Social Security benefits can and should be a material factor in planning – especially since the rates have the greatest impact on those whose income is relatively modest and may not realize they are exposed to 27.75% marginal tax rates when they “thought” they were in just the 15% or 25% tax brackets.

For many clients, though, the rates are at least partially unavoidable. In many situations, there simply is not enough income flexibility to spread income out to stay below the thresholds. Although notably, for some clients, the best thing to do is to actually accelerate income and lump it together after all, additional income beyond the point that the maximum 85% of Social Security benefits are taxable is subject to only a 15% tax bracket, which is far better than leaving the income until next year when it may be taxed at 27.75% due to the phase-in of Social Security benefits. In fact, in some cases it might even be worthwhile to trigger a bit of additional Social Security benefits taxation just to reach the cap and then add more income beyond it at a current tax bracket!

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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. Missouri, for instance, taxes Social Security benefits only if your income is at least $85,000, or $100,000 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.

Although you can’t have state taxes withheld from your Social Security benefits, you generally can make estimated state tax payments. Check with the state tax agency where you live for information about the your state’s estimated tax payment rules.

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What Is The Medicare Tax Limit

The Medicare tax is not limited to an annual income cap, although the Social Security tax is. In 2022, the Social Security tax is limited to the first $147,000 you earn.

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How To Calculate Your Social Security Income Taxes

If your Social Security income is taxable, the amount you pay will depend on your total combined retirement income. However, you will never pay taxes on more than 85% of your Social Security income.

Again, 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 2022. For the 2022 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 is 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:

• half of your annual Social Security benefits OR
• half of the difference between your combined income and the IRS base amount

The example above is for someone whos paying taxes on 50% of their Social Security benefits. Things get more complex 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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