Social Security Employment, Taxes & SSB
If you or your spouse (if applicable) have worked a covered job and earned enough “work credits,” you may qualify for retirement income benefits through Social Security. According to the Social Security Administration, an average wage earner can often replace over 40% of pre-retirement earnings through these benefits alone. With that in mind, it is essential to know how to maximize the benefit you generate and avoid taxation on this income so that you bring in as much net spendable cash flow as possible.
Who is Eligible to Collect Social Security Retirement Income Benefits?
Not everyone qualifies for Social Security retirement benefits. To be eligible for these benefits, you must be at least age 62 and have worked in a covered job where you or your spouse (if applicable) paid taxes into the system and accumulated 40 work credits. One credit is equal to a dollar amount of income. Presently (in 2024), one work credit is earned for every $1,730 of earnings. A maximum of four work credits may be earned each year. Therefore, it can take ten years of work (by you or your spouse) to be eligible for Social Security retirement income benefits. While eligible individuals can file for Social Security benefits as early as age 62, the dollar amount of each payment will be reduced—not just temporarily, but for the remainder of your lifetime—if you file before your full retirement age (FRA). Your FRA can be anywhere between age 65 and 67, based on the year you were born.
Social Security Full Retirement Age (FRA)
| Year of Birth | Minimum Retirement Age for Full Benefits |
|---|---|
| 1937 or Before | 65 |
| 1938 | 65 + 2 months |
| 1939 | 65 + 4 months |
| 1940 | 65 + 6 months |
| 1941 | 65 + 8 months |
| 1942 | 65 + 10 months |
| 1943 to 1954 | 66 |
| 1955 | 66 + 2 months |
| 1956 | 66 + 4 months |
| 1957 | 66 + 6 months |
| 1958 | 66 + 8 months |
| 1959 | 66 + 10 months |
| 1960 or Later | 67 |
Source: Social Security Administration
A non-working spouse may claim Social Security spousal benefits. These are typically 50% of the working spouse’s benefit, provided the spouse waits to file until their full retirement age. Otherwise, the dollar amount will be reduced if these benefits are claimed early. Alternatively, if an eligible worker or spouse waits until after their full retirement age to claim Social Security, the dollar amount of each benefit payment will increase by 8% per year until they reach age 70. (At that time, it is still unnecessary to file for benefits. However, the increase in the amount will stop). You can apply for Social Security retirement income benefits by visiting the SSA’s website at https://ssa.gov/benefits/retirement/apply.html.
How are Social Security Retirement Benefits Funded?
Millions of individuals and families benefit from Social Security every year. In addition to the payment of retirement income benefits, this program also offers disability income and survivors’ benefits to those who qualify. It is important to note that the only individuals who may still legally collect Social Security benefits without paying into the system are the family members of workers who have done so. In this case, non-working spouses, ex-spouses, offspring, or parents may be eligible for spousal, survivor, or children’s benefits based on the record of the qualifying worker. With all the benefits paid out through Social Security, the program must be properly funded. This is done primarily through taxation. Both employees and employers typically pay taxes into the Social Security system. Therefore, you will pay both portions of this tax if you are self-employed. The amount of this tax is based on your annual earnings, up to a preset amount. In 2024, that amount is $168,600. You pay Medicare taxes on all of your wages or net earnings from self-employment.
Social Security and Medicare Taxes
| Year of Birth | Minimum Retirement Age for Full Benefits | Medicare Tax |
|---|---|---|
| You pay: | 6.2% | 1.45% |
| Your employer pays: | 6.2% | 1.45% |
| If you are self-employed: | Social Security Tax | Medicare Tax |
| You pay: | 12.4% | 2.9% |
Source: Social Security Administration (https://www.ssa.gov/pubs/EN-05-10024.pdf)
Workers may have to pay an additional 0.9% Medicare tax on income that exceeds certain thresholds. The amount of this tax is determined as follows:
Additional Medicare Tax
| Tax Filing Status | Threshold Amount |
|---|---|
| Married filing jointly | $250,000 |
| Married filing separately | $125,000 |
| Single | $200,000 |
| Head of household (with qualifying person) | $200,000 |
| Qualifying widow(er) with dependent child | $200,000 |
Source: Social Security Administration (https://www.ssa.gov/pubs/EN-05-10024.pdf)
Social Security and Medicare are closely related. For instance, the Social Security Administration works with the Centers for Medicare and Medicaid Services to inform older Americans about their Medicare enrollment options, process their Medicare applications, and collect due premiums. (Although the Centers for Medicare & Medicaid Services, and not the Social Security Administration, manages Medicare). The taxes that current workers collect are used to fund the benefits of current Social Security retirement income recipients and those receiving Medicare Part A (hospitalization) unless a recipient has enough work credits to qualify for premium-free Medicare Part A. All Medicare Part B enrollees are required to pay a premium. In 2024, 85 cents of every Social Security tax dollar workers pay into the system goes into a trust fund. It is from this trust fund that the benefits for current Social Security recipients are paid out. (This includes retirement income and benefits for eligible survivors of a deceased worker). The other 15 cents from these tax payments go into a trust fund that pays out benefits to qualified disabled individuals and their families. In addition, Social Security also pays the cost of managing the program from these trust funds—although these costs equate to less than one penny of every tax dollar the program receives. Likewise, the entire amount of Medicare taxes goes towards a trust fund that pays some of the expenses for hospitalization and other related care for Medicare beneficiaries. It is important to note that Original Medicare enrollees (i.e., those who are covered by Medicare Part A and Part B) will often have to pay out-of-pocket costs such as deductibles, coinsurance, or copayments when receiving covered services, as well as items like medical equipment and supplies.
Are Social Security Retirement Benefits Taxable?
Many people are unaware that Social Security retirement income benefits may be taxable. There are actually several scenarios where this could be the case, depending on whether or not you have reached your FRA when you file for benefits, as well as the amount of income that you receive from other sources (if any), and whether you file your income tax return as a single individual or as a married couple.
So, based on your situation, you may have to pay tax on a percent of your Social Security benefits (in 2024) if you fall into one of the following parameters:
- You file your federal income tax return as an individual, and your combined income is:
Between $25,000 and $34,000 (up to 50% of your benefits may be taxable)
More than $34,000 (up to 85% of your benefits may be taxable)
- You file your federal tax return jointly with your spouse, and you have a combined income that is:
Between $32,000 and $44,000 (up to 50% of your benefits may be taxable)
More than $44,000 (up to 85% of your benefits may be taxable)
- You are married, and you file a separate income tax return.
Your combined income equals your adjusted gross income plus any non-taxable interest earned plus one-half of your Social Security benefits.
Budget Wisely
How to Maximize the Amount of Retirement Income You Receive
You have many different options to file for Social Security benefits—and after many years of paying taxes into the system, you or your spouse will likely want to obtain as much income as possible. Because of that, it can help if you discuss your retirement objectives, as well as your risk tolerance and time frame, with a financial advisor who is also well-versed in the workings of Social Security benefits. That way, you can be in a better position to maximize your future Social Security income and reduce or eliminate taxes to generate more net spendable cash flow. If you would like to set up a time to chat with a retirement income planning specialist, please feel free to contact us directly by phone at <phone number>. Or you can email us any questions you have at <email address>, and we will get back to you with the answer. We look forward to assisting you with planning your ideal retirement lifestyle.
