Understanding how the Social Security tax impacts you as an individual taxpayer can be complicated. Here, we provide the answers to a few common questions about this tax, from self-employment to receiving benefits.
Social Security taxes
Social Security didn't always exist. The concept was implemented in the Social Security Act of 1935, which provided benefits for the primary worker in a family when they retired at age 65. It set the groundwork for the Social Security payroll tax that started getting collected in 1937 under the Federal Insurance Contributions Act (FICA). This tax was designed to fund the Social Security benefits that would be paid out.
Since its inception, additional benefits have been added to the Social Security program, including survivors' benefits, disability benefits, and more. Here's what you need to know about how the Social Security tax works today.
How and why the Social Security tax is levied
Social Security is a payroll tax that is used to fund Social Security benefits. For most people, the tax is withheld from your paycheck with an equal amount paid by your employer. Others, such as self-employed individuals, typically pay their own Social Security tax as both the employee and the employer.
Today, the tax requires employees to pay 6.2% of qualifying earnings. Your employer matches that 6.2%. This results in a total contribution of 12.4% of your qualifying earnings. The taxes get paid into a trust fund that is used to pay for Social Security benefits for current recipients.
Where Social Security gets its funding
Social Security benefits are funded from three major sources. The largest is tax. Technically, this tax is broken down into two parts. The first, Old-Age and Survivors Insurance (OASI), is taxed at a rate of 5.3% (or 5.015% prior to 2019). The second, Disability Insurance (DI), is taxed at 0.9% (or 1.185%. prior to 2019). Combined, these are commonly referred to as the 6.2% Social Security tax.
Other funding comes from interest earned on the balance in the Social Security trust fund as well as the taxation of Social Security benefits.
The Social Security tax doesn't always apply to all of your income. Any qualifying income above the Social Security wage base does not incur any Social Security taxes. In 2022, the wage base was $147,000. It changes each year with inflation.
Some people don't have to pay the Social Security tax if they qualify for an exemption. However, these people typically will not be able to claim any Social Security benefits. These exemptions usually apply only to tiny portions of the population, including certain religious groups such as the Amish and Mennonite communities. Also, some state and local governments participate in certain public retirement systems in lieu of Social Security.
Some U.S. residents may qualify for a religious exemption. To qualify, you must be a member of a religious group that existed prior to the end of 1950. The group must provide for its dependent members with a reasonable standard of living, and it must object to accepting Social Security benefits.
If you are a member of one of the qualifying groups, you have to fill out Form 4029 to apply for this exemption. In order to qualify, you must never have been eligible to receive benefits under Social Security programs. If you're eligible, even if you haven't made claims yet, you cannot use this exemption.
Students may qualify for a temporary exemption if they're employed by the same school where they're enrolled. Students only qualify if they are employed because of their enrollment status. That means you must be a student before you obtain the job. Your job must also require you to remain a student for the exemption to qualify. This exemption only applies to income earned through the school-related job, not any other income.
Certain non-U.S. citizens and employees of foreign governments working in the U.S. may also qualify for Social Security tax exemptions. This exemption usually depends on the type of visa a person holds.
Do self-employed individuals pay Social Security tax?
Self-employed individuals have to pay both the employee and employer parts of payroll taxes, including Social Security tax, instead of just paying the employee portion of the tax, thanks to the 1954 Self-Employed Contributions Act (SECA). This act made it so that self-employed individuals have to pay Social Security and Medicare taxes.
As far as Social Security taxes go, that means self-employed individuals pay a 12.4% Social Security tax on self-employment net earnings. Part of the tax is considered a deductible business expense, but it does not make up for the much larger taxation amount self-employed individuals pay out of their own pockets compared with what an employee of a company would pay out of their paycheck.
Will I pay the tax if I continue working after I start claiming Social Security?
You may still be working when you begin drawing Social Security benefits. It may seem counterintuitive to continue paying the tax once you start taking benefits. However, you must pay the Social Security payroll tax as long as you earn wages or self-employment income that isn't exempt from FICA or SECA taxes.
How much tax do I have to pay to qualify for Social Security benefits?
Figuring out if you qualify for traditional Social Security retirement benefits isn't as simple as making sure you've paid a certain dollar amount of Social Security taxes. Instead, the system uses Social Security credits to determine eligibility. To qualify for traditional Social Security retirement benefits, you must have earned 40 Social Security credits.
Starting in 1978, you could earn up to four Social Security credits per year by paying Social Security taxes. You earn credits based on your wages and self-employment income for the year.
In 2022, you earn one credit for each $1,510 in covered earnings. To earn the full four credits possible in 2022, you must earn at least $6,040. The amount to earn one credit may change from year to year and was lower in years before 2022.
Do I pay Social Security tax or income tax on my Social Security benefit payments?
If you earn between $25,000 and $34,000 per year as a single filer (or $32,000 to $44,000 if you’re married filing jointly), you will pay income taxes on up to 50% of your Social Security benefits. If you earn more than $34,000 (or $44,000 if you’re married filing jointly), you’ll pay taxes on up to 85% of your benefits. You will never be taxed on more than 85% of your Social Security benefits.
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