Ask Rusty – About Payroll Tax and Income Tax on Social Security

National Social Security Advisor at the AMAC Foundation

Dear Rusty: Is it possible for you to go over how the Federal withholding tax is computed on Social Security benefits? Signed: Curious Taxpayer.

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Dear Curious: I’m not sure if you’re asking about how FICA (or self-employment) tax on your earnings from work is determined, or if you’re asking about how much income tax to have withheld from your Social Security benefit, so I’ll address both: 

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The 7.65% FICA tax withheld from your earnings by your employer consists of two elements – 6.2% is for Social Security and 1.45% is for Medicare Part A. Your employer pays an equivalent amount on your behalf. This is a standard amount that all American workers pay, which - after enough credits are earned - enables you to collect Social Security benefits when you retire and permits you to enroll in Medicare Part A for free when you’re 65. If you are self-employed, you pay a “self-employment tax” on your net earnings instead of a FICA tax, and you must pay both the employee and employer portion of the tax (15.3%). The only exception to this is that certain U.S. states have opted out of participation in the Federal Social Security program, thus exempting some state employees from paying the Social Security portion of the FICA tax (they must still pay the Medicare Part A portion). These percentages are set by Congressional legislation and will not change unless Congress enacts future legislation to do so. 

Determining how much income tax to have withheld from your Social Security is something best discussed with a qualified Tax Advisor with access to all your income data. Your recommended tax withholding rate for income tax purposes depends upon your overall taxable income level and the tax rate which results from that income (considering your dependents and your tax filing status (single or married)). Having income tax withheld from your Social Security benefit is optional, but if you choose to do so you must submit IRS form W-4V to your local Social Security office. Form W-4V permits you to specify that either 7%, 10%, 12%, or 22% of your SS benefit be withheld for income tax purposes. Here’s a link to IRS form W4-V: https://www.irs.gov/pub/irs-pdf/fw4v.pdf.

The IRS may levy income tax on a portion of your Social Security benefits depending on your combined income from all sources. Your “combined income” consists of your Adjusted Gross Income (AGI) on your tax return, plus 50% of your Social Security benefits received during the tax year, plus any other non-taxable income you may have had. Tax on your SS benefits is computed at your normal IRS tax rate and based on your tax filing status. 

If you file your income tax as “single” and your combined income from all sources exceeds $25,000, then half (50%) of your SS benefits becomes part of your overall taxable income. And if your combined income from all sources as a single filer exceeds $34,000 then up to 85% of your SS benefits become taxable income.

If your income tax filing status is “married-filing jointly” and your combined income is over $32,000 then 50% of your Social Security benefits received during the tax year becomes part of your taxable income. If, as a couple filing “married/jointly,” your combined income exceeds $44,000, then up to 85% of the SS benefits you received during the tax year becomes part of your overall taxable income.