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Anthony Pellegrino – How Is Social Security Taxed?

Social Security Taxed

For most of us, Social Security serves as a form of retirement income that we all eagerly await. But do you know how taxes associated with your Social Security benefits work? Filing and paying both state and federal taxes on certain types of Social Security income can be complex, so having a basic understanding of the taxation rules is essential. In this blog post, Anthony Pellegrino provides an overview of the taxability rules surrounding Social Security benefits to give you a better understanding of how they are taxed.

How Is Social Security Taxed? Anthony Pellegrino Answers

According to Anthony Pellegrino, Social Security taxes are imposed on wages by the federal government and are used to fund a range of programs, including Social Security benefits. The amount of Social Security tax paid is determined by an individual’s taxable income. The U.S. Social Security Administration (SSA) collects 6.2% in payroll taxes from wage earners up to the income cap set for that year, which is $142,800 for 2019 (indexed annually). Employers must match this amount in order to contribute 12.4%.

The employee portion of the tax is generally withheld from each paycheck and reported on IRS Form W-2. This money goes into a trust fund managed by the SSA, where it helps to pay out benefits such as retirement, disability, and survivor benefits. Self-employed individuals are required to pay the full 12.4% Social Security tax since they do not have an employer contributing half of it. The self-employed only pay taxes on 92.35% of their net earnings up to the income cap set for that year.

Employees who earn more than the set income cap may still be required to pay Social Security taxes on any income over this limit if they also receive a salary from another job or are receiving wages from self-employment activities in addition to their regular employment. For example, someone earning $150,000 from one job plus $20,000 from freelance work would need to pay Social Security taxes on the $7,800 (the difference between the two income levels) that is above the $142,800 limit.

Some lawmakers, as per Anthony Pellegrino, have proposed eliminating the Social Security tax for low-income workers or raising the income cap to reduce the burden on middle-class taxpayers. Others have proposed raising the Social Security tax rate to increase benefits for future generations. Ultimately, any changes to the Social Security tax are likely to be significant and will require a compromise between Democrats and Republicans in Congress.

To illustrate this further, consider the example of a manufacturing worker earning $50,000 per year. During 2019, they would pay 6.2% in Social Security taxes on the full amount of their wages, or $3,100. Meanwhile, a lawyer earning $200,000 per year would only pay 6.2% in Social Security taxes on the first $142,800 of their earnings and nothing on the remaining portion. This means that they would be paying only $8,916.96 in Social Security taxes during 2019. So while both individuals are contributing to the same program to fund retirement benefits for current and future generations of Americans, one is paying more than six times as much as the other due to differences in income levels.

Anthony Pellegrino’s Concluding Thoughts

According to Anthony Pellegrino, the Social Security tax is generally considered to be a regressive tax since it takes a larger percentage of income from lower-wage earners than from higher-wage earners. The SSA has estimated that about 41% of Americans will pay more in payroll taxes than they will receive in benefits when they retire. However, this does not take into account the fact that lower-income individuals are more likely to rely on Social Security benefits as a greater percentage of their overall retirement income than higher-income individuals.