Maximum Taxable Income 2022
The Social Security Administration sets an annual maximum limit on the amount of any employees wages thats subject to the Social Security tax. This is called the contribution and benefit base, and it changes annually. For 2022, the maximum wage amount subject to Social Security tax is $147,000.
Theres no maximum taxable limit for Medicare tax, so you and the employee would continue to split the 2.9% tax on earnings over $147,000, even though those earnings wouldnt be subject to the Social Security tax.
The wage base subject to federal and state unemployment tax also changes annually. The amount of wages subject to FUTA and SUTA taxes is capped based on the wage base for each.
Place Some Retirement Income In Roth Accounts
Contributions to a Roth IRA or Roth 401 are made with after-tax dollars. This means theyre not subject to taxation when the funds are withdrawn. Thus, the distributions from your Roth IRA are tax-free, provided that theyre taken after you turn 59½ and have had the account for five or more years. As a result, the Roth payout wont affect your taxable income calculation and wont increase the tax you owe on your Social Security benefits. Distributions taken from a traditional IRA or traditional 401 plan, on the other hand, are taxable.
The Roth advantage makes it wise to consider a mix of regular and Roth retirement accounts well before retirement age. The blend will give you greater flexibility to manage the withdrawals from each account and minimize the taxes you owe on your Social Security benefits. A similar effect can be achieved by managing your withdrawals from conventional savings, money market accounts, or tax-sheltered accounts.
Federal Payroll Tax Rates
In most cases, the federal payroll tax rate is about 15.3%, with the employee covering 7.65% and the employer covering 7.65%. If youre self-employedas a sole proprietor or business owneryoure responsible for the full 15.3%, usually referred to as self-employment tax.
Potential additional taxes and credits based on your circumstances could change what your business is responsible for paying.
Employers and employees pay federal employment taxes that include payments toward Social Security, Medicare and unemployment insurance.
Social Security and Medicare taxes are collectively known as FICA taxes, for the Federal Insurance Contributions Act included in the 1930s New Deal legislation that introduced Social Security. Unemployment tax is known as FUTA tax for the Federal Unemployment Tax Act of 1939 that introduced that benefit.
The rates have gone up over time, though the rate has been largely unchanged since 1992. Federal payroll tax rates for 2022 are:
- Social Security tax rate: 6.2% for the employee plus 6.2% for the employer
- Medicare tax rate: 1.45% for the employee plus 1.45% for the employer
- Additional Medicare: 0.9% for the employee when wages exceed $200,000 in a year
- FUTA tax rate: 6% for the employer on the first $7,000 paid to the employee
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Who Has To Pay Social Security Taxes
If you work as an employee in the United States, your employer will deduct Social Security taxes as part of your payroll. If you are self-employed, you are responsible for remitting your own Social Security taxes. Under both situations, most workers are required to contribute Social Security taxes up to IRS limits.
Under limited circumstances, some individuals may claim a qualifying religious exemption or temporary student exemption. Foreign government employees and nonresident aliens may also not be required to pay Social Security taxes. Last, individuals that don’t make enough money may also not end up paying Social Security.
Social Security Tax Rates
The Social Security program provides benefits to retirees and those who are otherwise unable to work due to disease or disability. Social Security often provides the only source of consistent income for people who can no longer workespecially for those with modest earnings histories.
Because Social Security is a government program aimed at providing a safety net for working citizens, it is funded through a simple withholding tax that deducts a set percentage of pretax income from each paycheck. Workers who contribute for a minimum of 10 years are eligible to collect benefits based on their earnings history once they retire or suffer a disability.
Social Security benefits are capped at a maximum monthly benefit amount based on earnings history. To prevent workers from paying more in taxes than they can later receive in benefits, there is a limit on the amount of annual wages or earned income subject to taxation, called a tax cap.
For 2021, the maximum amount of income subject to the OASDI tax is $142,800, capping the maximum annual employee contribution at $8,853.60. For 2022, the maximum amount of income subject is $147,000, capping the maximum annual employee contribution at $9,114.00. The amount is set by Congress and can change from year to year.
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How To Calculate Your Social Security Income Taxes
If your Social Security income is taxable, the amount you pay will depend on your total combined retirement income. However, you will never pay taxes on more than 85% of your Social Security income.
Again, if you file as an individual with a total income thats less than $25,000, you wont have to pay taxes on your Social Security benefits in 2022. For the 2022 tax year , single filers with a combined income of $25,000 to $34,000 must pay income taxes on up to 50% of their Social Security benefits. If your combined income is more than $34,000, you will pay taxes on up to 85% of your Social Security benefits.
For married couples filing jointly, you will pay taxes on up to 50% of your Social Security income if you have a combined income of $32,000 to $44,000. If you have a combined income of more than $44,000, you can expect to pay taxes on up to 85% of your Social Security benefits.
If 50% of your benefits are subject to tax, the exact amount you include in your taxable income will be the lesser of either:
- half of your annual Social Security benefits OR
- half of the difference between your combined income and the IRS base amount
The example above is for someone whos paying taxes on 50% of their Social Security benefits. Things get more complex if youre paying taxes on 85% of your benefits. However, the IRS helps taxpayers by offering software and a worksheet to calculate Social Security tax liability.
When Will Social Security Increase Be Announced
We won’t know the 2023 COLA for sure until mid-October, when the Social Security Administration announces it. Last year’s increase was 5.9%, the highest in 39 years. Over the previous 10 years, it averaged about 1.7% annually as inflation remained low.
When consumer price data showed inflation at a 40-year high in June, the Senior Citizens League calculated its COLA prediction to be as high as 10.5%. But as inflation has slowed since then, the expected increase for Social Security recipients has dipped as well.
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Three Ways To Reduce The Taxes That You Pay On Benefits
Is Social Security taxable? For most Americans, it is. That is, a majority of those who receive Social Security benefits pay income tax on up to half or even 85% of that money because their combined income from Social Security and other sources pushes them above the very low thresholds for taxes to kick in.
But there are three strategies you can useplace some retirement income in Roth IRAs, withdraw taxable income before retiring, or purchase an annuity, to limit the amount of tax you pay on Social Security benefits.
What Is Supplemental Security Income
Social Security Disability Insurance benefits and SSI benefits differ based on who receives them and why. SSI recipients do not need to meet the same disability or work credit requirements like those who receive Social Security Disability Insurance benefits.
Generally, SSI payments go to the elderly, blind, or disabled. Also, SSI benefit recipients often qualify for Medicaid assistance automatically.
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Withdraw Taxable Income Before Retirement
Another way to minimize your taxable income when drawing Social Security is to maximize, or at least increase, your taxable income in the years before you begin to receive benefits.
You could be in your peak earning years between ages 59½ and retirement age. Take a chunk of money out of your retirement account and pay the taxes on it. Then, you can use it later without pushing up your taxable income.
This means you could withdraw funds a little earlyor take distributions, in tax jargonfrom your tax-sheltered retirement accounts, such as IRAs and 401s. You can make penalty-free distributions after age 59½. This means you avoid being dinged for making these withdrawals too early, but you must still pay income tax on the amount you withdraw.
Since the withdrawals are taxable , they must be planned carefully with an eye on the other taxes you will pay that year. The goal is to pay less tax by making more withdrawals during this preSocial Security period than you would after you begin to draw benefits. That requires considering the total tax bite from withdrawals, Social Security benefits, and other sources. Be mindful, too, that at age 72, youre required to take RMDs from these accounts, so you need to plan for those mandatory withdrawals.
How Social Security Taxes Work
The fact that levies are applied to benefits is “extremely unpopular,” Altman said. “People hate it, but it actually makes policy sense,” she said.
One key reason that it makes for good policy is that Social Security benefits and private pensions are taxed in a similar way.
When the program was created in 1935, benefits were not taxed. That began to change in 1983, when Congress changed the rules so that up to 50% of Social Security benefits could be included in taxable income, if a taxpayer’s income was over certain thresholds.
More changes came in 1993, which raised the portion of certain Social Security benefits subject to taxation to 85%. That change applied to higher income beneficiaries.
The result is a complicated set of rules that still applies today.
First, the taxes are based on what is known as provisional or combined income. That includes half of your Social Security benefits plus your adjusted gross income and nontaxable interest. That means that any income from wages, interest, dividends or other taxable income is counted.
Then the 50% and 85% thresholds are applied.
Individuals with combined income between $25,000 and $34,000 will pay income tax on up to 50% of their benefits. That also goes for couples with incomes between $32,000 and $44,000.
Individuals with combined income of more than $34,000, as well as couples with more than $44,000, may pay tax on up to 85% of their benefits.
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Uncle Sam Can Tax Up To 85% Of Your Social Security Benefits If You Have Other Sources Of Income Such As Earnings From Work Or Withdrawals From Tax
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Many people are surprised to learn that Social Security benefits can be taxed. After all, why is the government sending you a payment one day and asking for some of it back the next? But if you take a closer look at how the federal tax on Social Security is calculated, you’ll see that many people actually don’t pay any tax on their Social Security benefits.
There’s no federal income tax on Social Security benefits for most people who only have income from Social Security. Thanks to the highest cost-of-living adjustment in 40 years, the average monthly Social Security check for a retired worker in 2022 is $1,658, which comes to $19,896 per year. That’s well below the minimum amount for taxability at the federal level.
On the other hand, if you do have other taxable income such as from a job, a pension or a traditional IRA then there’s a much better chance that Uncle Sam will take a 50% or 85% bite out of your Social Security check. Plus, depending on where you live, your state might tax a portion of your Social Security benefits, too.
payments sent by the Social Security Administration are not taxable.)
How To Pay Taxes On Social Security
If you owe taxes on your Social Security income, you can pay them in a few ways. First, you can pay them each Tax Day, just as you paid taxes when you were younger. You may also consider paying estimated taxes quarterly if you expect you may owe taxes.
Alternatively, if you expect your Social Security benefits to be taxable, you may want to withhold federal taxes from your payments, just like you did from your paycheck when you were working.
You can do so by completing Form W-4V, Voluntary Withholding Request, and sending it to your Social Security office. You can elect to have 7%, 10%, 12% or 22%withheld from your payments.
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The Future Of Social Security Taxation
There have been a few proposals to eliminate the taxation of Social Security benefits, but with a looming shortfall in 2034, dont hold your breath for any proposal succeeding that would reduce revenues for the SSA. Taxes on Social Security benefits are probably here to stay.
Instead of waiting on the unlikely elimination of these taxes, start building a plan to potentially reduce or eliminate these taxes.
A Roth IRA is a good place to start. It is probably the most valuable tool for minimizing Social Security taxes. Why? Roth distributions are not included in your combined income!
If you think you may eventually be subject to taxes on your Social Security benefit, consider building a pool of money in your Roth account. You may be able to contribute to a Roth IRA up to $6,000 .
Check with your retirement plan at work, as well, to see if they offer a Roth option. Using a Roth in 2022 will allow you to put in up to $20,500 per year .
Finally, you may want to consider converting traditional IRAs to Roth IRAs. Theres certainly a lot to consider when doing so, but since the tax benefits could extend beyond the tax free nature of the Roth, this could be a winning move.
As a next step in your learning about this topic, you should consider joining the nearly 400,000 subscribers on my YouTube channel! This is where I break down the complex rules and help you figure out how to use them to your advantage.
History Of Social Security Tax Rates
The Social Security tax began in 1937. At that time, the employee rate was 1%. It has steadily risen over the years, reaching 3% in 1960 and 5% in 1978. In 1990, the employee portion increased from 6.06 to 6.2% but has held steady ever sincewith the exception of 2011 and 2012.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 reduced the contribution percentage to 4.2% for employees for those years employers were still required to pay the full amount of their contributions.
The tax cap has existed since the inception of the program in 1937 and remained at $3,000 until the Social Security Amendments Act of 1950. It was then raised to $3,600 with expanded benefits and coverage. Additional increases in the tax cap in 1955, 1959, and 1965 were designed to address the difference in benefits between low-wage and high-wage earners.
The Social Security tax policy in the 1970s saw a number of proposed amendments and re-evaluations. The Nixon Administration was paramount in arguing that tax cap increases needed to correlate with changes in the national average wage index in order to address benefit levels for individuals in different tax brackets. The 1972 Social Security Amendments Act had to be revamped due to problems with the benefits formula that caused financing concerns. A 1977 amendment resolved the financial shortfall and established a tax cap increase structure that correlated with average wage increases.
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State Taxes On Social Security
Twelve states tax Social Security benefits in some cases. Check with your state tax agency if you live in one of these statesColorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, or West Virginia. As with the federal tax, how these agencies tax Social Security varies by income and other criteria.
How Can I Avoid Paying Taxes On Social Security
Here’s how to reduce or avoid taxes on your Social Security benefit:
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How Federal Taxes On Social Security Are Calculated
Once you start collecting Social Security benefits, you’ll get a Social Security benefits statement in the mail each year in January showing the total amount of benefits you received in the previous year. To figure out how much, if any, of the total amount may be taxed, the first thing you need to do is calculate your “provisional income.” Your provisional income is generally equal to the combined total of 50% of your Social Security benefits, your tax-exempt interest, and the other non-Social Security items that make up your adjusted gross income .
For single people, your Social Security benefits aren’t taxed if your provisional income is less than $25,000. The threshold is $32,000 if you’re married and filing a joint return. If your provisional income is between $25,000 and $34,000 for a single filer, or from $32,000 to $44,000 for a joint filer, then up to 50% of your Social Security benefits may be taxable. If your provisional income is more than $34,000 on a single return, or $44,000 on a joint return, up to 85% of your benefits may be taxable.
The IRS has a handy calculator that can help you determine whether any of your Social Security benefits are taxable and, if so, how much. Once you know how much is taxable, that amount is included on Line 6b of Form 1040 and becomes part of your taxable income. That income is then taxed with other income according to your tax bracket.