Social Security Tax benefits those who qualify, such as retirees, the disabled, combat veterans, and bereaved families. Payroll and employer contributions fund the program.
About 179 million people already contribute to Social Security, and about 65 million receive monthly benefits.
Slightly more than half of those who get Social Security payments also have to pay taxes on that money. Learn the ins and outs of Social Security taxes right here.
Social Security Tax: What is It?
The United States government collects a fee known as the Social Security tax from employers and employees to pay for the Social Security program.
Federal Insurance Contributions Act (FICA) payroll taxes and Self-Employed Contributions Act (SECA) self-employment taxes fund Social Security Tax.
Millions of Americans get retirement, disability, and survivorship benefits each year from the Old Age, Survivors, and Disability Insurance (OASDI) Program, officially known as Social Security and funded by the Social Security levy.
How does Social Security Tax Work?
Employed and self-employed individuals must pay a portion of their earnings to Social Security. This common tax is taken out of workers’ paychecks and sent to the government.
Workers’ contributions to Social Security are not for their future benefit. Instead, they are to provide benefits to retirees and those already receiving Social Security.
Survivors’ benefits, which are paid to a spouse after the death of their partner or to a child after the death of a parent, are funded in part by the Social Security levy collected from working individuals.
The tax rate for Social Security will be 12.4% in 2022. The employer is liable for covering half of the tax (6.2%), while the worker is responsible for protecting the remaining 2.4%. A worker’s taxable earnings, such as salary, wage, and bonus, are subject to Social Security tax at the same rate.
On the other hand, there is a cap on income above which the tax rate kicks in. In 2022, you will withhold Social Security taxes from wages up to $147,000 per year; earnings above this threshold are not taxable. It will set this cap at $160,200 in 2023.
How can we Calculate Social Security Tax?
Your Social Security tax is simple to compute. To calculate your Social Security tax, either as an employee or as a self-employed person, take your annual salary (up to $147,000) and multiply it by your Social Security tax rate.
For illustration, in 2023, Michael is employed by a corporation and earns $150,000. The first $147,000 of his salary is exempt from Social Security tax, so his total tax payment is $9,114 (6.2% of $147,000). (0.062).
If he goes into self-employment and maintains the same $150,000 annual salary, he will be responsible for paying 16% of his first $147,000 earnings as his Social Security share. His responsibility is $18,228 ($147,000 x 12.4%). (0.124). In contrast, if he is eligible for the self-employment tax deduction, he may be able to reduce his tax liability.
Taxation of Social Security Benefits
You may have to pay taxes on your Social Security retirement, survivor, and disability payments. Your taxable income and your tax filing status determine your tax burden. Up to 85% of a person’s benefits are subject to taxation by the IRS, albeit only some pay the tax.
If you want to know if your Social Security benefits are taxable, you’ll need to do some math and know how much money you get from other sources.
- Check Your Tax Payer Filing Status
- Compute the Total Amount of Your Annual Social Security Payment.
- Determine Half of Those Advantages.
- Add Up Your Salary, Pension, Interest, Dividends, and Gains on Investments and Capital.
- Put That Sum with the Fifty Percent of Your Social Security Payments.
Can I Avoid the Taxes on Social Security?
Depending on your income level and other factors, you may have to report your Social Security benefits as taxable income after you begin receiving them. Your Social Security benefits could be subject to a 50% tax rate if your annual income is between $25,000 and $34,000.
Over $34,000 in yearly income might result in a tax rate of 85%. You can reduce your taxable income by working less, shifting income-generating assets into an individual retirement account (IRA), taking smaller distributions from your retirement plan, or donating your RMD.
That’s it from my side. Stay tuned to the blogs for more informative articles!
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