Tax Considerations
Social Security is a pay-as-you-go program—that is, the Social Security taxes collected from workers are not set aside in an account for each worker but are used to pay benefits to current beneficiaries of the program. Put another way, when someone begins receiving benefits, she is not drawing on a fund of some specific amount that consists of her previous tax deposits plus earnings. Those benefits are financed by the taxes currently collected from covered workers.
Social Security benefits are financed by a payroll tax on employers, employees, and the self-employed. There is no Social Security tax on investment income (e.g., interest or dividends) or any kind of income other than earnings from employment or self-employment.
The rate of tax is a flat amount set by Congress and adjusted upward from time to time. The tax rate for employers and employees is currently set at 6.2% (not counting the additional tax for Medicare). The self-employment tax rate is 12.4%—twice the employee rate—because self-employed individuals pay both the employee and the employer portion of the tax. The tax rate is multiplied by the relevant earnings figure to compute the Social Security tax.
A portion (up to 85%) of the Social Security retirement income benefit is includable in the worker’s adjusted gross income for tax purposes. Various formulas apply depending on the level of adjusted gross income, whether the taxpayer is married or single, and if married, whether filing separate or joint returns.
Social Security benefits are financed by a payroll tax on employers, employees, and the self-employed. There is no Social Security tax on investment income (e.g., interest or dividends) or any kind of income other than earnings from employment or self-employment.
The rate of tax is a flat amount set by Congress and adjusted upward from time to time. The tax rate for employers and employees is currently set at 6.2% (not counting the additional tax for Medicare). The self-employment tax rate is 12.4%—twice the employee rate—because self-employed individuals pay both the employee and the employer portion of the tax. The tax rate is multiplied by the relevant earnings figure to compute the Social Security tax.
A portion (up to 85%) of the Social Security retirement income benefit is includable in the worker’s adjusted gross income for tax purposes. Various formulas apply depending on the level of adjusted gross income, whether the taxpayer is married or single, and if married, whether filing separate or joint returns.