If you're employed, you may notice a line on your Social Security, FICA, or OASDI payment receipt. All are related to the same Social Security tax that you must pay and are independent of your federal income tax. Some of you have to pay federal income taxes on your Social Security benefits. This usually only happens if you have other substantial income in addition to your benefits (such as wages, self-employment, interest, dividends, and other taxable income that must be reported on your tax return).
Social Security tax is a percentage of the gross wage that most employees, employers, and self-employed workers must pay to fund the federal program. Certain groups of taxpayers are exempt from paying social security taxes. The employer is required to withhold the correct amount of Social Security taxes from each paycheck and send it to the federal government on time. Failure to do so can result in significant penalties.
At the end of the year, Social Security will send you a benefit statement for you to use when you complete your federal income tax return. That's because you'll never pay taxes on 100% of your benefits, while you'll pay your normal tax rate on income from other retirement accounts, unless you've selected a Roth IRA. You can also pay your tax bill by withholding taxes from other sources of income, such as IRAs, pensions or annuities, or by making quarterly payments to the Internal Revenue Service (IRS). Social Security tax is one of two taxes that all employers are required to withhold under the Federal Social Security Contributions Act (FICA).
Because your RMD is considered ordinary income, making smaller distributions while collecting benefits may lower taxes on your benefits or prevent you from paying taxes altogether. In addition to the reduction in federal taxes, 13 states also tax Social Security benefits using the federal provisional income formula or their own. The level of income used to determine if a person is subject to income tax on their Social Security benefits and how much is subject to tax. In general, whenever the term self-employment tax is used, it only refers to Social Security and Medicare taxes and not to any other taxes (such as income tax).
If you live in a state that counts Social Security benefits as taxable income, you should consult your state's tax department for more information and a qualified tax advisor. Your decision about when to apply for Social Security should include tax efficiency as a factor, that is, the amount of taxable income you retain after paying applicable income taxes. You can use this benefit statement when you complete your federal income tax return to find out if your benefits are taxable. You may be subject to taxes on your Social Security income based on your tax bracket, which is based on the income you earn.
