Social Security provides retirement benefits to workers who have paid into the system through Social Security payroll taxes. You can begin drawing retirement benefits as early as age 62, but at a reduced rate. You can draw a full benefit at your full retirement age, which varies from 65 to 67, depending on the year you were born. Social Security taxes are due and payable on any wage income, no matter what your age or retirement status.
Payroll Tax Rates
Workers support the Social Security system through payroll taxes. Your employer deducts Social Security and Medicare tax from your wages or salary, and contributes his own portion as well. As of 2012, the payroll tax rate for workers stood at 4.2 percent of gross income. The employer's share was 6.2 percent. Anyone who is self-employed pays these taxes through self-employment tax, and contributes both employer and employee shares. Social Security caps taxable income at $113,700 as of 2013. Wages above this amount are not subject to Social Security tax.
Working and Retirement
Many retirees continue to work, at least part time, to protect savings they might have built up during their working lifetimes. If you draw Social Security benefits, you still have the right to work. But if you work before full retirement age Social Security will reduce your benefit $1 for every $2 you earn. This deduction ends when you reach full retirement age.
Full Retirement Age
At full retirement age, you draw a full Social Security benefit, whether or not you still earn money from a job or any other source. This benefit remains the same until you die, with annual cost-of-living adjustments that are supposed to help you keep up with price inflation. For 2013, the cost-of-living adjustment was 1.7 percent. You no longer pay into the Social Security system if you stop working. If you continue working you pay payroll taxes just as before, at the same rate as everyone else. There is no age limit for payroll taxes.
You might have to pay income taxes on your Social Security benefits -- it all depends on your filing status and income level. At most, the IRS will tax 85% of your benefits at whatever your tax rate is. These taxes are never withheld from your monthly benefit, as they would be from a regular paycheck. Instead, the IRS provides a worksheet that allows you to figure the amount of the tax when you prepare your tax return. If you're earning a good income on top of the Social Security, it's a good idea to pay quarterly estimated taxes during the year. That way, you won't be stuck with a big bill come April 15.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.