One may describe the U.S. Social Security system as a giant financial safety net for Americans because it provides financial support to members who have reached retirement age. It also helps younger folks who have suffered a serious injury or severe illness. It also aids the families of members who died or those who experience disability.
Medicare, the health insurance program that covers the majority of Americans above 65 years old and some handicapped people, is also an integral part of the safety net.
Taken as a whole, Social Security is like a very large caring hand; they pay out an average of $40 billion in benefits annually, according to the SSA.
But remember that these benefits cost the U.S. government money and this money has to come from somewhere. If you’re a working American, you know that this money comes directly from your paycheck. Technically, it’s the Social Security Trust Fund that disperses the funds, but it is the contribution of every worker that fills up this collection.
Since its beginning in 1930, more workers have put in a percentage of their salaries into the fund than the retired people who have been drawing money from it. Lately, the ratio has been slowly shifting, thanks to increased life expectancy and the Baby Boomer generation. Analysts from the US government warned that the Social Security Trust Fund could run out of money in 30 to 40 years. This would require the workers to put in more to the fund from their salaries in the future just to guarantee that the fund will continue to exist.
How Does Social Security Work?
In 1935, the Social Security Act gave birth to Social Security as a financial parachute for older Americans. Before its creation, support for the elderly fell to states, town, cities, and of course families. It was not yet a federal concern as it is today.
The program depends on the contributions that members make into the system.
The process is simple: while a person is employed, he keeps contributing to Social Security and when he eventually retires from work, he receives benefits.
Contributions come in the form of Federal Insurance Contributions Act (FICA) taxes that employers withheld from most paychecks.
People normally look a Medicare and Social Security benefits as coming from a single source but in truth, Medicare is a different program. Your employer withholds your Medicare contributions from your paycheck in the same manner as your Social Security contributions. The FICA taxes you pay help support both Social Security and Medicare.
The Maximum Social Security Tax For 2019
The now popular tag, Social Security tax originally came from the Old-Age, Survivors and Disability Insurance program (OASDI) tax. The concept centers on building up a fund for the members’ benefits by automatically deducting a set percentage of their income every month as their contribution while their respective employers also add their own. Every year, the law determines this percentage and the government applies it to employees and employers.
For example, in 2019, the tax for both employees and employers reached 6.2% of employee compensation or a total of 12.4%. Self-employed individuals, since they are technically their own employers, must contribute the whole 12.4% for the year.
For 2019, the law has set that the Social Security tax annual limit to $132,900. Therefore, any amount that an employee earns above the limit of $132,900 is no longer subject to Social Security tax.
Social Security Benefits Eligibility
You are eligible for Social Security benefits if you’ve worked for at least 10 years (for those born in 1929 or later). The guidelines set 10 years as the minimum length of time for an employee to earn the mandatory 40 credits. But remember that even if you have already accumulated your 40 credits, you can only start receiving payouts when you reach 62 years old.
Calculate Your Payout
The Social Security Administration (SSA) sends each member an annual benefit statement that gives an estimate of how much they will get if they wait until the full retirement age. If you don’t want to wait for the statement, you can go to the SSA’s website and use their online calculator to estimate your benefits.
Here’s a caution: the younger you are, the less accurate the estimate will be because of the unknown variables that may come into play later. For example, your future earnings will affect the amount of contribution you will give and correspondingly, your future benefits.
How Do I Know I’m Getting Credit For The Years I Worked?
You should be receiving through the post each year a summary of your benefits from the Social Security Administration. They usually send this about three months before your birthday. If you want a copy right away, you can request one from the SSA by calling 800-772-1213 and asking for a form SSA-7704. You can also download the form.
The information you will find on your statement is a record of your earnings history, the number of credits you’ve accumulated to date, and an estimate of the retirement benefits available for you if you wait until full retirement age. Make sure that all the information is accurate because your benefits will depend on the data of your lifetime earning they have printed on the report.
The Right Way To Claim For a Social Security Tax Refund
Practically every American who earns a salary has to pay Social Security payroll taxes.
If it were up to them, most people would want to receive their pay in full and without any deductions. The truth is, there are not many instances when a worker can get any or some of those taxes back.
If you are earning more than the Social Security tax cap from more than one employer, you may be paying more taxes than you have to. When this happens, the member has two choices. Apply the excess to the individual’s federal tax bill – or simply refund the money. We said that every employer should match their employees’ tax contribution. However, in case they discover an overpayment, they cannot get a refund.
Why Would I Have Too Much Social Security Tax Withheld?
You might wonder how this could ever happen when there is a maximum amount of tax that your employer should withhold from your paycheck on your behalf. Your employer knows too well that the higher the amount they withhold from you, the higher the employer’s contribution they would have to make. So, naturally, they would try to avoid withholding too much Social Security tax from your paycheck.
What your employer doesn’t know or has access to is how much you are earning from your other job. So, if you earn income from different sources – two employers or income from business or self-employment, it’s highly possible and probable that you will initially pay too much tax.
How Do I Get My Money Back?
When you file your annual tax return, look at a section on Form 1040. Here you can indicate your overpaid Social Security taxes. On Line 71, you can specify to treat your excess Social Security tax as though you made an early payment to the IRS against your income tax.