Do You Know Much About Your Social Security Tax?

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Paying taxes is a mundane task everyone despises, but it has to be done. When it comes to Social Security tax, the topic is just as confusing. Every month, you have to pay Social Security tax on your income, and the amount depends on how much you make every year.

It's often difficult to understand which portion of your income goes towards Social Security tax and how much you need to pay each year. Many questions arise when we think about our taxes: Who sorts out how much your Social Security tax is? How is Social security tax calculated?

When will you get that money, and how do you claim it? Fortunately, we can help answer some of the questions burning in your mind! The good thing is, working out your taxes and how much Social Security you need to pay can be pretty simple once you know what you're doing.

In this blog post, we'll break down what Social Security tax is and how it works so you know exactly what you're paying into your retirement account and what you'll expect to receive when your retirement day comes. If you're worried about how much tax you're paying or you just want to work out how much Social Security tax is, keep reading!

Table Of Contents:

  • What is Social Security Tax?

  • How is Social Security Tax Calculated?

  • Claiming Your Social Security Benefits

    • Calculating Your Social Security Benefits

  • How much Is Social Security Taxed?

    • Individual Social Security Tax Rates

    • Married Social Security Tax Rates

  • Federal vs. State Social Security Tax

  • Conclusion

What Is Social Security Tax?

Social Security tax is a percentage of your income that goes to fund Social Security. These compulsory contributions paid to the general government help fund retirement, disability, and survivorship benefits we get from the Social Security Administration. The vast majority of American workers pay into the country's Social Security system through payroll taxes, although there are a few exceptions.

This money gets taken out of your paycheck, however, it does not go into your own personal Social Security savings account. Unlike a 401(k), the IRS takes this money from you and your employer and dumps it into one big pot, where the money is then dished out to people who are currently receiving Social Security benefits.

Social Security tax is essential as it determines how much retirement benefits you will receive - this is calculated by how much you put in, how long you’ve been contributing, and at what age you request your money. While it's a legal requirement to pay Social Security tax, it's suggested that you should also have your own retirement fund to increase your pension when it's time for you to retire.

Social Security tax isn't just an individual taxing system, though; employers are required by law to match each employee's contribution up to a certain amount each year. The total rate changes each year, but the average American pays about 7%.

Usually, your employer pays half and then withholds money from your paycheck for your share, so you don't notice the loss - this is also known as Social Security tax withholding. Some people worry about their Social Security taxes being too high for their current living situation or not enough for when the time comes to retire.

If these sound like all too familiar worries, you should work out how much benefits you want when you retire, which will then tell you what you should be paying to get the monthly benefit sum you want. 

How Is Social Security Tax Calculated?

The big question on everyone's mind is just how much is Social Security tax - but there isn't a fixed answer for this. Social Security tax is different for everyone, so to work out how much your Social Security tax is costing you, you need to know how Social Security tax is calculated.

Your Social Security tax is calculated by taking a set percentage of your income from each paycheck. Social Security tax rates are determined by law each year and apply to both employees and employers. As of 2021, the Social Security tax rate for both employees and employers is 6.2% of employee compensation, for a total of 12.4%.

This means that you'll have to pay out 6.2% of your annual wage in social security tax, although your employer will also pay 6.2% from their own pocket. Those who are self-employed are liable for the complete 12.4% as you are considered both the employer and employee.

You can calculate your Social Security payments pretty smoothly with the help of a calculator and some simple maths, but if you're not self-employed, you can simply check your monthly paystub for your Social Security tax payment. Luckily, there is a tax cap to stop you from paying too much tax. You can create your paystubs with our paystub generator.

As of 2021, the tax cap is $142,800, which means you'll get taxed the 12.4% Social Security rate on your wages up until the tax cap wage. If you earn over $142,800, you won't get taxed on any money you earn over that amount.

Claiming Your Social Security Benefits

Workers who contribute for a minimum of 10 years are eligible to collect benefits based on their earnings history once they retire or suffer a disability. The minimum age at which you can claim your Social Security benefits is 62, so if you're in need of Social Security support and are within the minimum age requirement, you can start claiming!

Before you decide on claiming your benefits, it might be best to use up any other income you have, as delaying your Social Security benefits will increase the size of your monthly benefit payments. You'll receive your full monthly benefit when you reach full retirement age - this varies depending on what year you were born.

Some retirement ages are very precise, even down to the month, so be sure to check your retirement age carefully if you don't want to get hit with any early benefit taxes. 

Calculating Your Social Security Benefits

Luckily, you don't have to sit and work out your Social Security benefits. Using the Social Security Administration website, you can work out your monthly payments and look at multiple options if you're still unsure what age you want to retire.

In addition, the Social Security benefits calculator is available to use online and will give you an estimate of your benefits based on your actual Social Security earnings records - this is more efficient than any other calculator or generator out there as it uses your personal records and details.

How Much Is Social Security Taxed?

Now that you know how to calculate and claim your Social Security, you might be wondering if your benefits will be taxed and if so, how much is Social Security taxed? Get ready for some good news - you won't ever pay taxes on more than 85% of your retirement benefits! Some taxpayers aren't required to pay any federal income taxes on their Social Security benefits.

However, individuals that have a substantial amount of additional income along with their Social Security benefits are typically required to pay taxes on their benefits; you can do this in quarterly estimated tax payments to the IRS, or you can elect to have federal taxes withheld from your benefits.

How much of your Social Security is taxed is based on your combined income - this is calculated by adding your adjusted gross income, nontaxable interest, and one-half of your Social Security benefits.

If you're looking to tap into your Social Security benefits, you'll need an SSA-1099 form from the IRS, which tells you how much Social Security you've received for the entire year and you'll use it to calculate how much you'll owe in Social Security taxes.

To work out how much your Social Security benefits will be taxed, if they are at all, you need to check with the correct tax rates. There are currently two primary tax rates: 

Individual Social Security Tax Rates

When filing your federal income taxes as a single person, your income tax will depend on how much your combined income is. If your combined income is below $25,000, all of your Social Security income will be tax-free; however, you'll have to face some fees if it's over $25,000.

For those with a combined income of between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. If your combined income is more than $34,000, you're looking at the possibility of up to 85% of your benefits being taxed. Still not too sure? Let's look at an example:

If you bring in an annual income of $65,000 and receive $1,750 a month in Social Security benefits, you'll pay taxes on 85% of the extra money you're earning over $34,000. As you're earning over the threshold for single filers, you'll pay taxes on 85% of your $21,000 in annual benefits - this is $21,000 x 85%, which works out at $17,850.

Married Social Security Tax Rates

For those who are married and are currently filing their federal income taxes, you have to consider both your combined incomes. If you are filing separately from your spouse but have lived together at any point during the tax year, your benefits may be taxable up to 85%. If you are married but haven't lived together at any point during the tax year, the IRS treats you as a single filer.

Married couples with a combined income of between $32,000 and $44,000 could get up to 50% of their benefits taxed. Anything above $44,000 is taxed up to 85%. If your combined income is below $32,000, all of your Social Security income is tax-free. Here's an example if you're uncertain:

Suppose you and your spouse are filing together and have an annual income of $42,000, plus $1,000 a month in Social Security benefits. As your income is between the 50% tax ranges ($32,000 and $44,000), you'll pay taxes on 50% of the $12,000 you earn in annual benefits, which is $6,000.

Federal Vs. State Social Security Tax

Now, don't get confused between federal income taxes and state taxes. There are currently 13 states that charge tax to your Social Security benefits - and that's on top of taxes you might pay the IRS if you're collecting Social Security older than full retirement age and/or have income above a certain amount. These states are:

  • Colorado

  • Connecticut

  • Kansas

  • Minnesota

  • Missouri

  • Montana

  • Nebraska

  • New Mexico

  • North Dakota

  • Rhode Island

  • Utah

  • Vermont

  • West Virginia 

Unfortunately for anyone living in these states, you will have extra taxes to pay when claiming your Social Security. As you might have guessed, each state has its own way of calculating how much tax you pay. If you want to know how much is Social Security tax in your state, check with your state tax agency

Conclusion

In the end, it's clear that paying Social Security taxes is an investment in your future. Social Security tax is calculated using a flat rate of 12.4% on your annual earnings, half coming from the employer unless you're self-employed.

While that may seem like a lot, thanks to Social Security tax withholding, you won't see the deduction and it's only a tiny percentage of what you'll get in return for paying those taxes now.

You can pay extra taxes if needed to receive early benefits or wait until retirement age to start receiving regular payments without any additional costs - either way is an option! Your Social Security tax will enable you to reap Social Security benefits when reaching retirement age (even earlier with some exceptions), as well as help provide assistance for others who need financial support during their later years.

When all is said and done, there are plenty of benefits worth waiting for! For more information on tax and how to prepare, take a look at some tax preparation and planning tips for this year. 

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Do You Know Much About Your Social Security Tax?
Samantha Clark

A Warrington College of Business graduate, Samantha handles all client relations with our top-tier partners. Read More

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