Social Security Tax: 6 Key Things Every Professional Must Know
Simply put, Social Security Tax is a payment made to the Internal Revenue Service every month. It reaps benefits for you after retirement or if you suffer from a disability. But how can you figure out how much you need to pay each month? What is the procedure to claim these benefits? Whether you are a salaried employee or a self-employed professional, it is vital to understand the ins and outs of this taxation.
FAQs on Social Security Tax
In this article, we cover the major questions most professionals have about this tax. Developing a good understanding of the same will let you stay on top of your income/spending and carve out a dependable retirement fund for your later years.
This tax is a percentage of your income paid to the IRS that goes toward Social Security, i.e., funding schemes for retirement, survivorship and disability. The IRS uses this money to roll out benefits for those currently getting Social Security provisions.
1. Why do we pay Social Security Tax?
Retirement pay is one of the primary benefits of this taxation. How much money you will get upon retirement is determined by how much you pay toward Social Security and the duration of your contribution.
2. Who pays Social Security?
It is a tax paid by both employees and their employers. Typically, an employer has to match the contribution of the employee to a fixed annual amount.
3. How much Social Security Tax do you need to pay?
The rate is subject to change every year. However, the usual rate in the US is around 7%. In 2021, for instance, the tax rate stands at 12.4% of your income (6.2% each for both employee and employer). Typically, an employer pays half of the total and withholds the other half from your pay. It is called Social Security “tax withholding.” Self-employed individuals need to pay the whole of the 12.4% on their own.
It is straightforward to calculate your net tax with a basic calculator. If you are employed by an organization, you can directly check your paystub. Even if you are self-employed, it is helpful to generate paystubs with a free paystub maker and keep documented financial records. At StubCheck.com, you can create printable check stubs at only $3.99 apiece and download them for easy access.
Social Security Tax does have a cap, which means you won’t have to pay tax on the amount you earn over the set cap. For 2021, the cap is $142,800.
4. How and when do you claim your Social Security benefits?
You can claim these benefits after contributing for at least ten years. Usually, you do this upon retirement at the minimum age of 62. It is wise to delay making a claim till the full retirement age of 70 as it will increase your benefit amount.
To calculate your benefits, you can use the Social Security Administration website . An online benefits calculator lets you get an estimate of your benefits depending upon your records. It is best to check your exact retirement date so you can plan your finances accordingly.
5. Do you have to pay tax on your Social Security benefits?
It depends on your total income: the sum of the gross income, non-taxable interest, and half of your Social Security benefits. So yes, you may not have to pay any tax at all. The cap is up to 85% of your benefits. It means you won’t have to pay any tax on the amount above this.
In the US, 13 states that charge tax to Social Security benefits. These states are Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia. You can check with the tax agency in your state to find the applicable law and rates.
6. How can you calculate tax on Social Security benefits?
For calculating the tax on your Social Security benefits, you require an SSA-1099 form. If you don’t get a check stub from your employer, you can create a paystub online. Then, you can find the applicable tax rate based on whether you are filing as an individual or a married couple.
Individual
| Below $25,000 | Between $25,000 and $34,000 | More than $34,000 |
| No tax | Tax on 50% of benefits | Tax on 85% of benefits |
Married
Here, your living arrangement with your spouse makes a difference. If you have lived with your spouse during the tax year, your benefits are taxable up to 85%. It applies even if you are filing your tax separately. In case you live separately from your spouse, you will be considered an individual filer.
| Below $32,000 | Between $32,000 and $44,000 | More than $44,000 |
| No tax | Tax on 50% of benefits | Tax on 85% of benefits |
Social Security benefits are a reliable and reassuring fund to serve you after you retire from service. These payments complement any other income you are banking upon, say, stocks, property purchases, interest payments, etc. Month on month, the withholding is a small percentage of your income, but the returns over time are significant.
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