Are Social Security Tax & Medicare Withheld From Retirement Income?

During your working years, you are accustomed to a portion of your paycheck being taken out to pay taxes, and you get what is left over. When you retire, things change, and that little bit that was held out during your working years can become a big deal. When planning for retirement, one of the questions you will probably ask is: Are Social Security tax and Medicare withheld from retirement income?

When you were in the working world, you probably noticed a box on your paycheck that was marked FICA. This stands for the Federal Insurance Contributions Act (FICA). When you were working, you paid half and your employer paid half for a total of ​15.3 percent​, as of March 2021. If you are self-employed, you paid the entire amount since you didn't have an employer contributing. It goes to fund Social Security retirement, disability, survivor’s benefits, Medicare and other programs.

As long as you are working for an employer or self-employed, you still have to pay FICA, even if you are partially retired. Several factors affect if and how much you pay to FICA in retirement. For instance, if you claim Social Security before reaching the full retirement age of 66, your extra earnings might trigger withholding. This will happen if your work income pushes you over certain limits, which in 2021 is ​$18,960​ per year.

If your only source of income is from Social Security, you do not have to pay taxes on it in most circumstances. You have the option of filing a form and having them withhold federal taxes from your Social Security check. You only need to do this if you have other sources of taxable income and you want to have the amount taken out for Social Security.

The bottom line is that if you still have taxable income, you still have to pay FICA. However, other types of income might be tax-free or only partially taxable. If all your combined sources of income meet certain thresholds, then you will need to pay taxes on part of your Social Security income. In 2021, the threshold is ​$25,000​ for individuals and ​$32,000​ for married couples.

If you have a traditional IRA, 401(k), 403(b) or SEP, they might be taxable if they were funded with pre-tax dollars. Most pensions are taxable, except for certain types of military pensions. Money earned from interest, dividend stocks and other capital gains will usually be taxed. The exception would be capital gains that fall under the 0 percent tax rate limits or from the sale of your primary residence.

Gains from an annuity that are not held in an IRA or retirement account are taxed as ordinary income. If an annuity is purchased with after-tax money, you will still have to pay taxes on the interest earned. If you cash in on a life insurance policy and the cash value exceeds your cost basis, then a portion will be taxable. Tax-free income generally includes income such as Roth IRA withdrawals, payments from a reverse mortgage, interest from municipal bonds and other similar types of income.

The topic of whether you will have to have, or wish to have, taxes taken out of your Social Security check depends on many different variables. Tax considerations are an important part of retirement planning. If you have any questions about your circumstances, the best person to consult is an attorney who specializes in retirement planning and tax issues.