Social Security is a program designed to provide financial support for individuals who are retired, disabled or have lost a loved one. In order to get the most out of Social Security, it’s important to know how to pay into it correctly. This article will provide tips and tricks to help you understand how to pay into Social Security and maximize your benefits.
Step 1: Understanding Social Security Taxes
Before you can pay into Social Security, it’s important to understand the taxes associated with the program. Social Security taxes are taken out of your paycheck automatically and the amount you pay is based on your income. For 2021, employees are required to pay 6.2% on income up to $142,800. Your employer will match this amount, resulting in a total of 12.4% being contributed to Social Security. If you are self-employed, you are required to pay both the employee and employer portion, resulting in a total of 12.4% being paid into Social Security.
Limitations on Social Security Taxable Income
It’s important to note that the amount of income subject to Social Security taxes is not unlimited. As of 2021, this amount is capped at $142,800. This means that if you make more than that amount, you will not be taxed for Social Security on the excess earnings. However, keep in mind that Medicare taxes are still applicable on all earnings.
Social Security Tax on Investment Income
Investment income is not subject to Social Security taxes. If you have passive income from investments, rental properties, or other sources, you will not have to pay Social Security taxes on this income. However, you will still be required to pay Medicare taxes on all investment income.
Step 2: Determine Your Eligibility Status
In order to receive Social Security benefits, you must first determine if you are eligible. Eligibility is determined by your age, work history, and disability status. To qualify for Social Security retirement benefits, you must be at least 62 years old and have worked for at least 10 years. For disability benefits, you must have a condition that prevents you from working and the condition must be expected to last at least one year or result in death.
Spousal and Survivors Benefits
In addition to retirement and disability benefits, Social Security also offers spousal and survivors benefits. If you are married, your spouse may be eligible to receive benefits based on your work record, even if you have not yet retired or claimed your benefits. Survivors benefits are available to the surviving spouse or children of a deceased worker.
Reduced Benefits for Early Retirement
It’s important to note that if you choose to retire before the age of 67 (the full retirement age for those born after 1960), your benefits will be reduced. For every year you retire early, your benefits will be reduced by 5/9 of 1%. This means that if you retire three years early, your benefits will be reduced by 20%. If you retire more than 36 months early, your benefits will be reduced even further.
Step 3: Setting up Your Social Security Account
In order to pay into Social Security and track your benefits, it’s important to set up a Social Security account. You can do this by visiting the Social Security Administration website and creating an account. Once you’ve created your account, you can track your benefits, review your work history and earnings, and make changes to your personal information.
Calculating Your Estimated Benefits
Using your Social Security account, you can also calculate your estimated benefits. This will allow you to plan for retirement and make any necessary adjustments to your savings and investment strategy. The estimated benefits provided by Social Security are based on the assumption that you will continue to work until your full retirement age.
Updating Your Personal Information
It’s important to keep your personal information up to date with Social Security. This includes your address, phone number, and work history. Any changes to your personal information should be reported to Social Security immediately to ensure that your benefits are accurate and up to date.
Step 4: Maximizing Your Social Security Benefits
Now that you understand how to pay into Social Security and the benefits available to you, it’s important to maximize your benefits to ensure that you get the most out of the program. Here are some tips to help you do just that:
Delaying Your Claim
If you are able to delay your claim for Social Security benefits, you can increase the amount you will receive. For every year you delay your claim beyond your full retirement age, your benefits will increase by 8%. This means that if you wait until age 70 to claim your benefits, you could receive up to 32% more than if you claimed at age 67.
Coordinating Spousal Benefits
If you are married, coordinating your spousal benefits can also help to maximize your Social Security benefits. The higher earning spouse should consider delaying their claim to allow their benefits to grow, while the lower earning spouse claims their benefits. This can help to increase the overall benefit amount for both spouses.
Work Longer
If you are able to continue working, working longer can help to increase your Social Security benefits. This is because your benefit amount is based on your average earning over your 35 highest earning years. By working longer, you can replace some of the lower earning years with higher earning years, which can increase your overall benefit amount.
Conclusion
Paying into Social Security correctly is essential in order to maximize the benefits you receive from the program. By understanding the taxes associated with Social Security, determining your eligibility status, setting up a Social Security account, and maximizing your benefits, you can ensure that you get the most out of this important program.
FAQs
- What age should I start collecting Social Security benefits?
You can start collecting Social Security benefits at age 62, but the longer you wait, the more you will receive. If you wait until your full retirement age (67 for those born after 1960), you will receive your full benefit amount. If you can afford to wait until age 70, you will receive an even higher benefit amount. - Do I have to pay Social Security taxes if I’m self-employed?
Yes, if you are self-employed you are required to pay both the employee and employer portion of Social Security taxes. - What happens to my Social Security benefits if I die?
Your spouse or children may be eligible to receive survivors benefits based on your work record. The amount of benefits they receive will depend on a variety of factors, including your earnings history, age, and the number of children you have.
References
- Social Security Administration. “Social Security – The Official Website of the U.S. Social Security Administration.” https://www.ssa.gov/.
- Investopedia. “Social Security Taxes: What You Need to Know.” https://www.investopedia.com/articles/retirement/062116/social-security-taxes-what-you-need-know.asp.
- Forbes. “How To Calculate Your Social Security Benefits.” https://www.forbes.com/advisor/retirement/how-to-calculate-social-security-benefits/.