Does Social Security Withholding Figure Into My Tax Return?
No matter what you do for a living, taxes play a role in your life. Even if you fall into a low federal income tax bracket, you are still subject to a number of payroll taxes, including the one that funds the Social Security program. Understanding how this tax is assessed, and how it affects you can help you plan your finances more effectively.
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Payroll Tax
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The tax that funds Social Security is a flat rate payroll tax, meaning that all workers pay the same percentage, regardless of income level. As of the time of publication, workers pay 4.2 percent of their earnings in Social Security taxes, and employers pay another 6.2 percent based on the worker's salary.
Income Cap
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Unlike Medicare and the federal income tax, the Social Security payroll tax has a cap. If you earn more than $106,800, any earnings above that level are free of Social Security taxes. If you fall into this category, your W-2 will reflect a total Social Security payroll tax equal to 4.2 percent of the first $106,800 in wages. Any additional earnings above that level are not subject to the Social Security tax.
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Pre-Tax Deductions
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If you make pre-tax contributions to a 401(k) plan, health savings account or health insurance plan, you will notice that the amount of your federal taxable wages is lower than your Social Security wages. That is because the amount you contribute to a retirement plan like a 401(k) reduces your federal taxable wages, but not your Social Security tax. For instance, if you earn $40,000 a year and contribute $5,000 to a 401(k) plan, your W-2 will show $35,000 in federal taxable wages, but $40,000 in Social Security wages.
Incorrect Withholdiing
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The only way Social Security withholding would have an impact on your actual tax return is if the amount of that withholding was incorrect. If you use a tax preparation software package to do your taxes, the program should automatically catch any withholding errors and send you an alert. If you file your taxes on your own and the amount withheld for Social Security is incorrect, you should receive a follow-up letter from the Internal Revenue Service, along with further instructions. It is a good idea to review your paycheck and ensure that your Social Security withholding is correct.
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