Is Social Security Tax & Medicare Withheld From Retirement Income?
Social Security and Medicare taxes come under the Federal Insurance Contributions Act, payable to the Internal Revenue Service under a pay-as-you-go method. Employers withhold the tax, match it and forward it to the IRS. Eventually, the IRS credits the taxes to a Social Security or Medicare trust fund, using your Social Security number for the credit. Social Security charges FICA taxes on earned income only, and taxes all earned income up to the contributions base limit each year.
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Unearned Income
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No withholding for Social Security and Medicare taxes exists for unearned income. Unearned income is interest -- money you receive from stocks and bonds, veteran's benefits and Social Security or Supplemental Security Income. You receive these funds without working for them. The law excludes them from FICA taxation.
Earned Income
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If you work after retirement, you continue to pay Social Security and Medicare taxes, even if you are collecting Social Security and Medicare yourself. Your employer withholds these taxes from your paycheck each pay period, and the IRS credits your account using your Social Security number. Your benefits will not likely increase as a result of your payments, but someone else benefits from your work during retirement. Social Security does not reserve funds for you personally, and even if your retirement costs more money than you have paid into the system, you get your entitlement for life.
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Taxable Amount
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If you are a high wage-earner, Social Security taxes stop at $106,800, as of 2011. This contributions base total increases with inflation, but remains the same in a non-inflation period. The IRS charges Medicare taxes on all earned income with no limit on earnings for the year.
Percentages
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FICA taxes withheld in 2011 are 4.2 percent for Social Security and 1.45 percent for Medicare. The employer matches those numbers and adds 2 percent more for Social Security in 2011. The employer usually matches the tax, but Congress gave the working taxpayer a 2 percent break in 2011 that does not apply to the employer. FICA taxes for 2011 total 13.3 percent for employee and employer. If you are an independent contractor, you pay both taxes as employer and employee. The 13.3 percent is the total of 4.2, 1.45, 4.2, 1.45 and 2 percent.
Federal Income Taxes
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You may pay federal income tax on your unearned income like Social Security when you retire. Social Security uses combined income to calculate whether you owe federal income taxes on your Social Security. The IRS adds your adjusted gross income, half of your Social Security for the year and non-taxable income from sources like municipal bonds to arrive at your combined income total. If your combined income exceeds $25,000, federal income tax may apply to your Social Security benefits.
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