Understanding Social Security and Payroll Taxes
Social Security and unemployment benefits are both intended to replace income for workers who have stopped working due to retirement or involuntary job loss. Currently, only the first $160,000 in wages are subject to Social Security payroll taxes. As a result, those earning below the cap pay an effective Social Security payroll tax rate of 6%, while those earning above the cap pay an effective rate of 1% or less. This has led to the introduction of the Social Security Expansion Act by progressive Sens. Bernie Sanders and Elizabeth Warren, which would require the wealthy to contribute into Social Security on all their income over $250,000, including investment income.
The Social Security Administration estimates that around 66 million people earned monthly Social Security benefits worth $1,681 on average last year. Each January, the Social Security Administration sends out a Social Security Benefit Statement (Form SSA-1099) showing the amount of benefits received in the previous year. This statement can be used to determine if benefits are subject to federal income tax.
A frequently discussed answer to Social Security’s impending financial problems is to elevate or do away with the tax limit. Doing so would fully fund the program, including increased benefits, for the next 75 years, according to Sens. Sanders and Warren. However, not all experts and lawmakers agree that increasing the Social Security payroll tax cap is the best way to solve the problem. Other proposed solutions include making quarterly estimated tax payments to the IRS or choosing to have federal taxes withheld from benefits.
It is important to be prepared for Social Security, regardless of how close you are to retirement. Knowing what to expect from Social Security, such as your monthly benefit and how much of it you’ll need to pay in taxes, is essential.
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