What is the Social Security Tax?
Social Security tax is usually collected in the form of payroll tax or self-employment tax. It is levied on both employers and employees to fund the Social Security program. Since the US has entered into the international social security agreement, commonly known as Totalization Agreements with other countries to coordinate social security coverage and taxation of workers employed for part or all of their working careers in one of the countries. It eliminates the dual coverage and dual contributions (taxes) for the same work and it provides an assurance that social security taxes are paid only to one country.
The funds collected will not be put as a trust for the employees benefit, rather be used to pay for the retirement, disability, and survivorship benefits received by millions of Americans each year, as well as benefits paid for widow or widower upon death of the spouse. The social security tax shall be paid equally by both the employee and the employer at the rate of 12.4%. The 6.2% shall be paid by the employee and the other half shall be shouldered by the employer.
The Social Security tax rate is assessed on all types of income earned by an employee including salaries, wages, and bonuses. In 2017, the Social Security tax has an annual income limit of $127,200 to which the tax rate will be applied and any amount above the limit shall be Social Security tax-free. For instance, employee A earns $75,000 x 6.2% = $4,560 and employee B earned $170,000 will pay security tax of $127,200 x 6.2% =$7,886.4 since the excess of income limit is considered tax free. It is a regressive scheme, the lower income earned the larger the portion of the income is withheld.
What Are The Exemptions?
Not every taxpayer has to pay the Social Security tax, exemptions are as follows:
Key Points to Help Reduce the Tax Bill
In determining the taxable social security income depends upon some variety of factors such as marital status, additional income earned and the combined income, up to 85% of your social security benefits could be taxable. For single filing status and with a combined income from $25,000 to $34,000 – 50% of your benefits could be taxable. If combined income is more than $34,000, up to 85% of benefits be subject to tax. If less than $25,000 your benefits are tax-free. For married and filing jointly, the 50% taxable range is $32,000 to $44,000, and the 85% threshold is a combined income of $44,000 or more. If the combined income is less than $32,000, it is free from taxes. For married but filing separately, the benefits are taxable regardless of your income.
For retirees whose only source of income is Social Security, generally, they don't pay income tax on their Social Security benefit. In March 2018, the average Social Security payment to retired workers was $1,411 or $16,932 for the year, which is below the taxable threshold of $25,000 for an individual. But according to the Social Security Administration, 40% of Social Security beneficiaries have to pay federal income tax on part of their benefit. The income threshold is not adjusted for inflation each year; more retirees will need to pay tax on their Social Security payments over time.
If you are still young and still years away from retirement, smart planning might as well help you eliminate taxes on your Social Security benefits in the future. You need to consider what type of retirement account you will choose. It will be more advantageous to choose a Roth IRA instead of the traditional IRA for your retirement savings. Young people must spend wisely and must invest carefully.
