Table of Contents
- What Is the Purpose of Social Security Tax?
- How Is Social Security Financed?
- Why Might My Supplemental Security Income (SSI) be Taxed?
- How Much Can I Expect to be Taxed Based on How Much I Receive?
- How Are the Social Security Tax Rates Calculated? Does it Change Year by Year?
- Is Social Security Tax Based on Net or Gross Income?
- What Is the Typical Income Tax Rate?
- Do I Have to Pay Taxes on Retirement Income?
- Do I Have to Pay Taxes on Disability Income?
- How and Where Do You Pay Social Security Taxes?
- When Do You Stop Paying Social Security Taxes?
Taxes under the FICA (Federal Insurance Contribution Act) comprise the old-age, disability, and survivors’ insurance taxes, also called Social Security taxes, and health insurance, also known as Medicare taxes. The current SS withholding rates for Social Security are 6.2 percent for employers and 6.2 percent for employees, adding up to 12.4 percent. The current tax rate for Medicare is 1.45 percent for employers and 1.45% for employees, adding up to 2.9%.
What Is the Purpose of Social Security Tax?
Social Security tax is the tax that the government levies on employers and employees to fund the Social Security program in the United States Social Security tax. It’s collected from payroll tax mandated by FICA or a self-employed tax as required by Self-Employment Contribution Act (SECA).
This tax pays for survivorship, disability, and retirement benefits that many Americans receive yearly through the Old Age, Survivors, and Disability Insurance program. Typically, for every dollar an individual pays in Social Security taxes:
- Eighty-five cents go to a trust fund that covers the monthly benefits of retirees and their families. That translates to an average monthly benefit of approximately $1,430.73.
- Fifteen cents cover disability benefits. Social Security Disability Insurance payments typically range between $800 and $1,800 a month. But the maximum disability benefits you can receive are $3,000 per month. The Social Security Administration (SSA) will determine your monthly payments depending on your lifetime average wages before you become disabled. Receiving other government benefits may reduce your monthly Social Security Disability Insurance benefits.
- Less than one cent covers administrative expenses, making SSA one of the most effectively run arms of the Federal Government.
How Is Social Security Financed?
Social Security is financed via dedicated payroll taxes. In 2022, employers and employees will each pay 6.2% of wages, adding up to a taxable maximum of $147,000, while self-employed people pay 12.4% to finance Social Security.
In 2021, approximately 90.1% of total Old-age, Survivors, and Disability Insurance (OASDI) benefits came from payroll taxes. The rest was generated from interest earnings ($70 billion, approximately 6.4%) and revenue from taxation of Social Security benefits 3.4%.
The law sets payroll tax rates for wages up to a certain amount. This amount, known as the earning base, increases as average earnings increase.
Why Might My Supplemental Security Income (SSI) be Taxed?
Supplemental Security Income is a federal income supplementation program funded by federal tax revenues. It aids disabled, blind, and aged people with low income. It helps those populations afford basic needs, including food and shelter.
Supplemental Security Income payments aren’t taxable. However, although SSI payments aren’t taxable, other federal-sponsored programs are and will affect your tax outcome.
Does Social Security count as income? Click here to learn more.
How Much Can I Expect to be Taxed Based on How Much I Receive?
All taxpayers don’t have to pay income tax on their SS benefits. However, only taxpayers with substantial income on top of their SS benefits must pay income tax on their SS income. Suppose you must pay taxes on your SS income. In that case, you can opt to have federal taxes withheld from your Social Security benefits or pay quarterly estimated tax payments to the Internal Revenue Service (IRS).
The taxable portion of your SSI largely depends on your combined gross income. Add adjusted gross income, non-taxable interest, and one-half of your SS benefits to calculate your combined income.
Suppose you file federal income tax as a single individual, and your combined gross income lies between $25,000 and $34,000. In that case, you’ll have to pay federal income tax on half of your Social Security income. If your combined gross income exceeds $34,000, 85% of your SS income is taxable. If your combined gross income is less than $25,000, your entire SS income is tax-free.
If you’re married and opt to file joint returns, and the combined gross income for you and your spouse ranges between $32,00 and $44,000, you must pay federal income tax on half of your SS income. If your combined gross income exceeds $44,000, 85% of your SS income might be taxable. However, if your combined gross income is less than $32,000, all your SS benefits are tax-free.
Lastly, if you’re married but you and your spouse file a separate return, you may have to pay income tax on your SS benefits. If you’re a SS benefits recipient, you’ll receive Form SSA-1099, Social Security Benefit Statement, every January. This form shows the percentage of SS income you received the last year. That information can help you determine if your SS benefits are taxable.
To learn about SSB and income tax, click here.
How Are the Social Security Tax Rates Calculated? Does it Change Year by Year?
The FICA tax is the employee payroll tax that funds SS benefits and Medicare health insurance. The tax is divided between employees and employers. They both pay 6.2% for Social Security and 1.45% for Medicare of their gross income to FICA; the total contribution is (6.2% + 1.45% = 7.65% x 2 = 15.3%.)
The maximum taxable income for employees as of 2022 is $147,000. There’s no wage base for Medicare.
The example below shows how SS tax is calculated:
An employee who earns $180,000 per year receives semi-monthly paychecks of $7,500 before taxes and any retirement-plan withholding. While Medicare tax is due on the entire salary, only the first $147,000 are subject to SS tax in 2022. After dividing $147,000 by $7,500, you get 19.6. Thus, that threshold is reached after the 20th paycheck.
For the first 19 periods, the total FICA tax withholding equals ($7,500 x 6.2%) + ($7,500 x 1.45%) = $465 + $108.75 = $573.75. Only Medicare tax applies for the remaining five pay periods, so the withholding tax reduces to $7,500 x 1.45% = $108.75. As a result, the employee will pay $8,835 to Social Security and $2,610 to Medicare annually. While this SS tax rate doesn’t affect the employee’s take-home payment, their employer must contribute the same figure to both programs.
Again, self-employed people are viewed as both the employee and employer for tax purposes, meaning they must pay both contributions. Considering the example above, a self-employed individual with the same salary will pay $17,670 to Social Security and $5,220 to Medicare.
Is Social Security Disability taxable? Click to learn more.
Is Social Security Tax Based on Net or Gross Income?
In 2022, Social Security taxes are 6.2% of the gross income of up to $147,000. So, the maximum amount you’ll pay this year is $9,114. Most employees pay their share via FICA taxes that are withheld from paychecks. Their employers also match their contributions.
What Is the Typical Income Tax Rate?
Social security taxes are 6.2% of gross income, up to $147,000 in 2022. So the most an employee can pay is $9,114. Many employees pay their social security taxes via Federal Insurance Contribution Act (FICA) taxes withheld from their payments. Self-employed people pay both shares, approximately 12.4% of their net income, through the Self-Employment Contribution Act (SECA) taxes that are paid via federal tax returns. This high tax burden is offset by a regulation allowing self-employed people to take half of what they pay in SECA taxes as an income tax deduction.
Another 1.45% of your gross income must help in funding Medicare. There’s no maximum income here. Thus, $1.45 of every $100 you make covers Medicare tax. Again, your employer matches that tax rate, and self-employed workers pay both shares or 2.9% of their net income.
Do I Have to Pay Taxes on Retirement Income?
You have to pay income taxes on your pension and any other withdrawals from tax-deferred investments like 401 (k) s, traditional IRAs, tax-deferred annuities, and similar retirement plans in the year you take your retirement benefits. The taxes you have to pay will reduce the money you have left to spend.
Do I Have to Pay Taxes on Disability Income?
You may have to pay taxes on your Social Security Disability income. This happens if you have other incomes that place you above certain thresholds. However, because Social Security Disability Insurance (SSDI) requires you to be disabled and with limited income to qualify for benefits, you may not have other income sources to exceed this threshold.
Instances when SSDI benefits might be taxable include when you have other income sources like tax-exempt interest and dividends or if your spouse has income in the form of taxable wages. If that sounds familiar, you need to know the thresholds for when your disability income could be taxable.
According to the IRS, your SSDI benefits might be taxable if one-half of your benefits and all other incomes exceed an income threshold depending on your tax filing status:
- $25,000 if you’re single, qualifying widow(er), head of household filing separately
- $32,000 if you’re married and filing jointly
- $0 if you’re married filing separately, but you live with your spouse any time during the tax year
For instance, if you’re married and filing jointly, you can report $32,000 of income before paying individual income tax on your Social Security Disability Insurance benefits.
How and Where Do You Pay Social Security Taxes?
Many people who pay Social Security taxes are employed. Their employer deducts SS taxes from their paychecks, matches this contribution, and then sends the taxes to the Internal Revenue Service. However, if you’re self-employed, you must report your self employment income and pay your Social Security taxes directly to the Internal Revenue Service (IRS).
When Do You Stop Paying Social Security Taxes?
Whether self-employed or salaried, you must contribute Social Security taxes throughout your working life. However, there are a few expectations, including members of some religious groups, American college students, and certain nonresident aliens. Also, federal workers hired before 1984 might be exempt from Social Security taxes as they contribute to a separate retirement system.