If you check your pay stubs, you’ve probably noticed that in addition to income tax withholding, you also have FICA taxes withheld. FICA includes taxes to pay for Social Security benefits and Medicare benefits. Understanding how these taxes work helps you budget for how much you’ll have withheld for all types of taxes.
Social Security taxes will not reduce the amount of federal income taxes that you owe since they are separate. However, if you end up with excess Social Security taxes withheld, you'd get a refund on your tax return that you could put toward paying any federal income taxes due.
Social Security Withholding
The Social Security tax is a tax on earned income, and it is separate from federal income taxes. The Social Security tax only applies to earned income, like your wages, salaries and bonuses, but not to unearned income like interest, dividends or capital gains. In addition, the Social Security tax only applies to a limited amount of income each year, known as the Social Security Contribution and Benefit base. This tax is separate from the income tax, so the amounts withheld from your paychecks for Social Security taxes won’t reduce your income taxes.
Limit on Social Security Taxes
If your earned income exceeds the Social Security Contribution and Benefit Base during the year, your employer will stop withholding Social Security taxes from your paycheck once you reach the base. However, if you work for multiple employers and the total of your wages exceeds the annual limit, you will likely have too much withheld. If this happens to you, you can claim a tax credit for the excess. The Medicare tax, however, doesn’t have any limit – it applies to all of your earned income.
2018 Social Security Limits
In 2018, the Social Security Contribution and Benefit Base is $128,400, which means if you make more than that, you won’t owe Social Security taxes on the excess. For example, if you earn $120,00 from your main job and $30,000 from a side hustle, you’ll have the Social Security taxes you paid on the last $21,600 refunded when you file your federal tax return. But, if you earned a salary of $150,000 from just one job, your employer would stop withholding Social Security taxes after you hit the $128,400 threshold.
2019 Contribution and Benefit Base
The Social Security Contribution and Benefit Base will be $132,900 in 2019, so the maximum amount of Social Security taxes due was slightly lower. However, the rules are still the same: once you reach the maximum amount of Social Security taxes withheld for the year, your employer will stop withholding it. But, if you have multiple employers, they don’t know what other income you have, so you can claim the excess withholding as a tax refund.
- Social Security Administration: Contribution and Benefit Base
- IRS: Publication 15
- IRS: Topic Number 608 - Excess Social Security and RRTA Tax Withheld
- Internal Revenue Service. "Social Security Income." Accessed Oct. 22, 2020.
- Social Security Administration. "Income Taxes and Your Social Security Benefit." Accessed Oct. 22, 2020.
- Social Security Administration. "Withholding Income Tax From Your Social Security Benefits." Accessed Oct. 22, 2020.
- Tax Foundation. "Does Your State Tax Social Security Benefits?" Accessed Oct. 22, 2020.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."