Payroll taxes include Social Security and Medicare withholding, which are Federal Insurance Contributions Act, or FICA taxes. You do not pay these on your yearly tax return, but your employer deducts them from each of your paychecks. The tax is 12.4 percent of your income for Social Security and 2.9 percent for your Medicare, but if you're employed and receive W-2 wages, your employer picks up half of the cost of the taxes. You pay Social Security taxes only on the first $117,000 you earn each year, while Medicare tax applies to all earnings.
Why Social Security?
The government takes Social Security taxes out of all workers' pay to fund the Social Security Trust system. Any overage not paid out in Social Security benefits is usually lent to the government for other operations. In theory, your Social Security contribution should be held in an account and applied to your benefits later in life. In practice, your current contributions fund today's Social Security benefits; future contributions, made by workers at that time, will pay your benefits.
Retirees start receiving Social Security benefits between age 62 and 70. The earlier you start your benefits, the less you get paid per benefit check. This is due to the fact that your benefit is spread over a longer period of time. The Social Security Administration provides detailed charts on its website, socialsecurity.gov, to help retirees determine when they should take their benefits.
Paying Social Security
When it comes to filling out your tax return, you don't have to worry about calculating your Social Security tax. When you get your W-2, simply use the amount of your wages reported in Box 1. Also, you can review your Social Security wages in Box 3 and your Social Security tax withheld in Box 4. If you earn less than the annual Social Security limit, do nothing. If for some reason the wages reported in Box 3 exceed the annual limit, notify your employer and have them correct your W-2. Your portion of the Social Security tax should come out to 6.2 percent of Box 3.
What About Tip Income?
If you work a job that earns tips, you may have to pay some additional Social Security taxes if your tip income is underreported. The IRS considers tips in excess of $20 a month as wages. Typically, when you earn tips, you report them to your employer on the 10th of the following month using IRS Form 4070. Your employer is responsible for withholding Social Security and Medicare taxes -- your portion and its portion. If your employer allocates your tips, check that the amount matches your records. You don't want to have to pay additional Social Security or Medicare on tips you never received. You can find this information in Box 7 and Box 8 of your W-2.
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