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A Guide to Social Security Tax

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A Guide to Social Security Tax



Social Security didn’t always exist. This concept was implemented in the Social Security Act of 1935, which provided benefits to the primary worker in a household who retired at age 65. It laid the foundation for the Social Security Payroll Tax (FICA), which began in 1937 based on federal insurance contributions. The tax is designed to fund Social Security benefits that will be paid.

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Since its inception, Social Security programs have added additional benefits, including survivor benefits, disability benefits, and more. Here’s what you need to know about how Social Security taxes work today.

How and why Social Security taxes are collected

Social Security is a payroll tax used to fund Social Security benefits. For most people, the tax is deducted from your paycheck, the same amount as your employer pays it. Others, such as the self-employed, usually pay their own Social Security taxes as employees and employers.

Today, the tax requires employees to pay 6.2% of qualifying income. Your employer matches that 6.2%. This results in a total contribution of 12.4% of your qualifying income. Taxes are paid into a trust fund that is used to pay Social Security benefits for current recipients.

Where does Social Security get its money from?

Funding for Social Security benefits comes from three main sources. The biggest is taxes. Technically, this tax is divided into two parts. The first is Old Age and Survivor Insurance (OASI), which is taxed at 5.3% (or 5.015% prior to 2019). The second is Disability Insurance (DI), which is taxed at 0.9% (or 1.185%. Before 2019). Combined, these are often referred to as the 6.2% Social Security tax.

Other funding comes from interest on Social Security trust fund balances and taxes on Social Security benefits.

key exemption

Social Security taxes don’t always apply to all of your income. Any qualifying income above the Social Security wage base will not incur any Social Security taxes. In 2021, the salary base is $142,800. It changes every year with inflation.

Some people don’t have to pay Social Security taxes if they qualify for an exemption. However, these people generally cannot apply for any Social Security benefits. These exemptions generally only apply to a small portion of the population, including certain religious groups such as Amish and Mennonite communities. Additionally, some state and local governments participate in certain public retirement systems in lieu of Social Security.

Some U.S. residents may be eligible for religious exemptions. To qualify, you must be a member of a religious group that existed before the end of 1950. The group must provide its dependent members with a reasonable standard of living and must object to receiving Social Security benefits.

If you are a member of one of these eligible groups, you must complete Form 4029 to apply for this exemption. To be eligible, you must have never been eligible for benefits under the Social Security program. If you are eligible, you cannot use this waiver even if you have not filed a claim.

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Students may be eligible for a temporary exemption if they are employed by the same school they attend. Students are only eligible if they are employed because of their student status. This means that you must be a student before you can get this job. Your job must also require you to remain a student to qualify for the exemption. This exemption applies only to income earned through school-related work and does not apply to any other income.

Certain non-U.S. citizens and foreign government employees working in the United States may also qualify for Social Security tax exemptions. This exemption usually depends on the type of visa a person holds.

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Do Self-Employed People Pay Social Security Taxes?

Because of the Self-Employment Contributions Act (SECA) of 1954, self-employed persons must pay both the employee and employer portion of payroll taxes, including Social Security taxes, not just the employee portion of the tax. The act states that self-employed individuals must pay Social Security and Medicare taxes.

In terms of Social Security taxes, this means that self-employed individuals pay a Social Security tax of 12.4% on their net self-employment income. Part of the tax is considered a deductible business expense, but self-employed people pay much more out of pocket than the company employees pay from their paychecks.

Will I pay taxes if I continue to work after I start claiming Social Security?

You may still be working when you start receiving Social Security benefits. It may seem counterintuitive to keep paying taxes once you start receiving benefits. However, as long as your wages or self-employment earnings are not exempt from FICA or SECA taxes, you must pay Social Security payroll taxes.

How much tax do I have to pay to qualify for Social Security benefits?

Determining whether you’re eligible for traditional Social Security retirement benefits isn’t as simple as making sure you’ve paid a certain amount of Social Security taxes. Instead, the system uses Social Security points to determine eligibility. To qualify for traditional Social Security retirement benefits, you must have earned 40 Social Security credits.

Starting in 1978, you can earn up to four Social Security credits each year by paying Social Security taxes. You earn credits based on your salary and self-employment earnings for the year.

In 2021, you will receive one credit for every $1,470 of insured income. To earn all four credits in 2021, you must earn at least $5,880. The amount to earn one credit may vary from year to year and will be lower for years prior to 2021.

Do I pay Social Security or income tax on my Social Security benefit payments?

If you earn between $25,000 and $34,000 per year as a single filer ($32,000 to $44,000 if you are married filing jointly), you will pay income tax on up to 50% of your Social Security benefits. If your income exceeds $34,000 (or $44,000 if you are married filing jointly), you will pay up to 85% of your benefit tax. You will never be taxed on more than 85% of your Social Security benefits.

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