As the anniversary of the Social Security bill being signed into law (August 14, 1935)[i] approaches, we’re reminded of the intricate workings of the US tax system. Social Security, a vital program designed to provide financial support to retired and disabled individuals, is funded through payroll taxes.[ii] Let’s explore the fundamentals of Social Security taxation, shedding light on how it works and its implications for both employees and employers.
- The Federal Insurance Contributions Act (FICA): Social Security taxation is governed by the Federal Insurance Contributions Act (FICA). Under FICA, employees and employers must contribute a portion of their income to fund Social Security and Medicare programs. These contributions are collectively known as payroll taxes.[iii]
- Social Security Tax: The Social Security tax, a component of FICA, is specifically earmarked to fund retirement, disability, and survivorship benefits. From 2020 – 2023, the Social Security tax rate stands at 6.2% for both employees and employers.[iv] This means that employees contribute 6.2% of their income, while employers match that amount.
- Earnings Subject to Social Security Tax: There is a cap on the earnings subject to Social Security taxation. In 2023, the maximum taxable earnings limit is set at $160,200.[v] This means that any income earned above this threshold isn’t subject to Social Security tax. However, being aware of this limit is essential as it can affect your tax liability and retirement benefits.
- Self-Employment Tax: The Social Security and Medicare taxes are combined into a single self-employment tax for self-employed individuals. The self-employment tax rate for Social Security is 12.4% (double the rate for employees), and the Medicare tax rate remains 2.9%.[vi] However, self-employed individuals can deduct the employer portion of these taxes when calculating their adjusted gross income.[vii] Self-employed individuals have additional responsibilities when it comes to Social Security taxation. They must calculate and pay the employer and employee portions of the self-employment tax, making proper estimation and planning crucial.
Disclaimer : The above are not inclusive of all Social Security tax considerations but merely a glimpse into some.
Understanding the intricacies of Social Security taxation is crucial for the sake of your retirement benefits. By comprehending the fundamentals, contribution rates, and limits, individuals can better plan for their financial future and make informed decisions about their tax obligations. While navigating the tax system can be complex, staying informed and seeking professional advice can help optimize retirement benefits.
If you’re prepared to seek guidance from a financial or tax expert who can offer personalized advice based on your circumstances, feel free to contact us for a complimentary review at (540) 720-5656.
Sources:
- [I]https://www.ssa.gov/history/50ed.html#:~:text=Roosevelt%20signed%20the%20Social%20Security,work%20begun%20by%20the%20Committee
- [II]https://www.ssa.gov/news/press/factsheets/HowAreSocialSecurity.htm#:~:text=Social%20Security%20is%20financed%20through,self%2Demployed%20pay%2012.4%20percent.
- [III] https://www.ssa.gov/thirdparty/materials/pdfs/educators/What-is-FICA-Infographic-EN-05-10297.pdf
- [iv] https://www.ssa.gov/oact/cola/cbb.html
- [v] https://www.pgpf.org/blog/2023/02/should-we-eliminate-the-social-security-tax-cap-here-are-the-pros-and-cons#:~:text=The%20limit%20on%20annual%20earnings,of%20%2413%2C200%20from%20last%20year.
- [vi]https://bench.co/blog/tax-tips/self-employment-tax/#v5mi-a
- [vii] https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes#:~:text=Employers%20calculate%20Social%20Security%20and,figuring%20your%20adjusted%20gross%20income
Amy Anderson joined the ILG Financial team in 2023 as the client relations coordinator. Her responsibilities include scheduling of appointments, annual check-up notifications, and annuity and required minimum distribution assistance. She is a graduate of Harding University with a degree in Computer Information Systems. Amy and her husband have two children and she enjoys reading, crocheting, music and spending time with her family.
Chase Lopez joined the ILG Financial team in 2020 as an advisor. Chase is a 2016 James Madison University graduate with a degree in management. Chase has been trained under the tutelage of Dave Lopez, who is not only the founder and managing member of ILG Financial, but also is Chase’s uncle and godfather. He also enjoys working alongside his cousin, Megan, who is Dave’s daughter. Chase, as a fiduciary, believes in putting his clients interests first, and building out plans for his clients where they can have a happy and fruitful retirement. He married his beautiful wife in February 2022 and both use most of their free time chasing around their little pup, Aurora.
Jessica Carson joined the ILG Financial team in 2018 as an agent. Jessica and her husband have four children, two dogs, 3 barn cats, 5 chickens, and three parakeets. She indeed loves her children and pets! When not at work, Jessica enjoys playing the piano and cello as well as traveling and spending time outside with her family, hiking, fishing, and boating.
Terri Center joined the ILG Financial team in 2019 as client services manager. She handles client records, application processing, and gathering information to provide a professional and friendly experience with all of our clients. Terri is a graduate of Oakland University. She is married and has two children. She enjoys hiking, family time, and puzzle challenging video games. She also likes to share her creativity in her canvas paintings and sewing projects.
Megan Jones joined the ILG Financial team in 2020 as marketing director. Megan and her husband live in Fredericksburg, VA with their German Short Haired Pointer, Gus. Megan is a graduate of Longwood University and holds a degree in communications. Megan is the oldest of Dave Lopez’s three children and not only enjoys working alongside her father, but also with her cousin, Chase, who joined the ILG Financial team in 2020 as an advisor. When not at work, Megan enjoys sitting on the back porch with family and friends enjoying food and music.