Social Security Benefits and Taxation

How are Social Security benefits determined?

How long a covered worker has worked throughout their life

When a fully insured dies, the survivors' benefits depend on the average lifetime earnings of the deceased. The benefits can be paid as follows:

-A lump sum death benefit of $255 (payable to spouse or children) -Widow or widower of insured - full benefits at 65 or older, or reduced benefits as early as 60 -Widow/widower of any age if taking care of the insured's child or children under the age of 16 or a disabled child -When the youngest child becomes of age, the benefits stop and won't resume until the surviving parent reaches age 60. The period during which the surviving spouse doesn't receive benefits from Social Security is called the blackout period. -Unmarried children under 18 (if attending elementary or secondary school full time) -Dependent parents age 62 or older

Disability benefits include:

-Disabled worker benefits -Spousal Benefits -Child's Benefits -Survivors' Benefits

Social Security establishes benefit eligibility based on an "insured" status. There are two types of insured statuses that qualify individuals for Social Security benefits:

-Fully Insured -Currently Insured Most Social Security benefits are paid to fully insured individuals.

Currently Insured

A covered worker who has accrued at least 6 quarters of coverage over the past 13 quarters ending with the quarter of disability onset, death or retirement, is currently insured.

Disability Insured

A covered worker who qualifies for Social Security disability benefits based on the number of quarters of credit earned.

How Benefits are Determined

A person must be insured under the Social Security program in order for survivors, disability or retirement benefits to pay. Social Security benefits are based on how long a covered worker has worked throughout their life.

Social Security

Federal social insurance program which provides retirement, disability, and survivors benefits. Also referred to as OASDI, or Old Age, Survivors, and Disability Insurance.

Medicare

Government health insurance coverage for individuals over the age of 65, and special needs individuals.

Retirement Benefits Example

If an individual retires at age 62 Their retirement benefits would be reduced by 20% for their entire life if they were born in 1937 or earlier and had a full retirement age of 65. Their retirement benefits would be reduced by 30% for their entire life if they were born in 1960 or later and had a full retirement age of 67.

Fully Insured and Currently Insured

In order to obtain fully insured status, a covered worker must accrue one quarter of coverage each calendar year after the age of 21 for a total of 40 quarters (about 10 years of work) and a minimum of six quarters, upon the earliest of: -The year prior to reaching age 62; -The year of disability onset; or -The year prior to death. Once a person has attained fully insured status, that person is fully insured for their entire life. In order to obtain currently insured status, a covered worker must accrue at least six quarters of coverage over the past 13 quarters ending with the quarter in which the covered worker: -Died; -Became disabled; or -Became entitled to retirement benefits.

Reduction

Method of handling risk in which ways of minimizing loss exposure are actively sought.

Childs Benefits

Monthly payments are made to an unmarried child under age 18 (19 if the child is a full-time high school student), or a child who became disabled before the age of 22 in the amount of 50% of the worker's PIA. A disabled covered worker, regardless of age, is eligible to receive full Medicare benefits after the waiting period and two years of receiving Social Security disability benefits - after 29 months. The maximum family benefit also applies to Social Security disability benefits.

Earnings Limit Upon Retirement

Once a covered worker reaches the normal retirement age, they are entitled to receive the full Social Security retirement benefit regardless of whether or not they continue to work. However, covered workers that begin to receive Social Security retirement benefits prior to their normal retirement age are limited to how much they can earn before their Social Security retirement benefits are reduced. These limits apply to ages before retirement up until the month that the individual reaches normal retirement age, at which point there are no limits.

Test Point

Social Security benefits are based on a worker's PIA (Primary Insurance Amount).

Disability Benefits

Social Security disability benefits are only available to covered workers who are fully insured and disability insured at the time of disability. Disability income benefits are paid to the covered worker in the amount of the PIA after a five-month waiting period. Social Security disability benefits are only available prior to the age of 65. Social Security does not pay partial disability or short-term disability benefits.

Calculating Benefits

The amount of Social Security benefits a person receives is based on the individual's average monthly wage during their working years. The primary insurance amount (PIA) is used to establish the benefit. It is equal to the worker's full retirement benefit at age 65. Individuals who retire early receive a reduced retirement benefit for the rest of their life because the benefits are paid for a long period of time.

Partial Disability

The inability to perform one or more work duties of a person's own occupation, or inability to work full-time.

Maximum Family Benefit

The maximum family benefit is the maximum monthly amount a covered worker and their family can receive. The maximum family benefit may be reached if a covered worker and their families are receiving Social Security Survivors' and disability benefits. This limit is indexed annually.

Covered Worker

A worker who is covered by Social Security.

The disability must be total and the following conditions must be met:

-The covered worker cannot do the work they did prior to the disability -The covered worker cannot do other work because of physical or mental conditions -The disability has already lasted or will last for at least 12 full months, or the disability is expected to result in death

Normal Retirement Age

The age (65 years) when a person is entitled to Social Security retirement benefits regardless of employment status.

Social Security Note

-A person who is covered by Social Security is currently participating in Social Security by paying FICA payroll taxes, regardless of whether the person is eligible for benefits. -A person eligible for Social Security refers to insurability status (fully insured or currently insured). -A person who is fully insured is entitled to full retirement and survivor benefits. -A currently insured person is only entitled to partial Social Security benefits.

The following people are not covered by Social Security:

-Federal employees hired before 1984 -Police officers who have a retirement program -State and local government employees (including teachers) covered by a state pension program - that have elected to not participate in Social Security -Employees covered by the Railroad Retirement Act -Religious workers who have declared a life of poverty -Self-employed individuals with low incomes

Retirement Benefits

-Social Security retirement benefits are only available to covered workers who are fully insured upon retirement. Benefits are paid monthly. If a covered worker retires at the normal retirement age, they will receive 100% of the PIA. However, if a covered worker retires early at the age of 62, the maximum Social Security benefit is 80% of the PIA. This reduction remains all through retirement. Retirement benefits pay covered retired workers at least 62 years of age, their spouses and other eligible dependents monthly retirement income. The full retirement age is 65 for covered workers who were born in 1937 or earlier. The full retirement age increases for individuals born between the years of 1938 to 1959, with the maximum retirement age set at age 67 for covered workers who were born in 1960 or later. The earliest a person can begin to receive Social Security retirement benefits is age 62. If a person retires early, the retirement benefits are reduced for their entire life based on the individual's full retirement age. Their retirement benefits would be reduced by 20% for their entire life if they were born in 1937 or earlier and had a full retirement age of 65. Their retirement benefits would be reduced by 30% for their entire life if they were born in 1960 or later and had a full retirement age of 67.

Earnings Test

A person under full retirement age that begins to receive Social Security retirement benefits while continuing to work is subject to an annual limit of $17,040. If the person reaches full retirement age in the current year, the limit on the earnings for the months before full retirement age is $45,360.

Dual Benefit Eligibility

A person who is eligible for multiple Social Security benefits, such as survivors and retirement. If a person is eligible to receive dual Social Security benefits, he or she will receive the larger amount, but not both.

Social Security Payroll Taxes Example

An employed person who earned $50,000 The individual would pay $3,100 for OASDI taxes ($50,000 × .062 = $3,100) and $725 ($50,000 x .0145 = $725) for Medicare tax. Notice this person's full earnings were subject to FICA tax. Suppose a person earned $200,000 Only the first $128,400 is subject to the OASDI portion of FICA taxes. However, the entire earnings are subject to Medicare tax because there is not a maximum taxable wage cap for Medicare taxes. The individual would pay $7,960.80 for OASDI taxes ($128,400 × .062 = $7,960.80) and $1,861.80 for Medicare taxes.

Quarters of Coverage

Basis for determining Social Security insured status. A maximum of 4 quarters can be earned in one year. Synonymous with quarters of credit.

Fully Insured

Insured status in which 40 quarters are required for survivors and retirement benefits, and 6 quarters are required for disability.

Quarters of Coverage or Credits

Insured status is based on how many quarters of coverage, or credits, a covered worker has earned. Quarters of coverage are earned based on the indexed national average wage, which increases annually. Currently, a quarter of coverage is earned for each $1,320 earned. A maximum of four quarters may be earned in one year. So, a covered worker earning $5,280 earns four quarters of coverage. Quarters of coverage earned are based on cumulative quarters worked, and do not have to be earned consecutively. A maximum of four quarters may be earned in one year.

Disabled Worker Benefits

Monthly payments are made to the disabled covered worker in the amount of the worker's PIA. At the earliest, the disabled covered worker may be eligible to receive Social Security disability benefits upon the sixth month of disability.

Spousal Benefits

Monthly payments are made to the disabled covered worker's spouse if the spouse is caring for a child under the age of 16, or a disabled child under the age of 22 in the amount of 50% of the worker's PIA. Spousal benefits are also payable if the spouse is age 65 in the amount of 50% of the worker's PIA. For a spouse age 62, the benefits are reduced.

Spouses Benefit

Monthly payments are made to the retired covered worker's spouse, age 65 and older, in an amount of 50% of the covered worker's PIA. The benefit is decreased for spouses receiving benefits at the earliest age of 62. Monthly payments are made to the spouse (includes divorced spouse over the age of 62), regardless of age, if the spouse is caring for the covered worker's unmarried dependent child under the age of 16 or a child who became disabled prior to age 22.

Childs Benefit

Monthly payments are made to the retired covered worker's unmarried child or grandchild who is under the age of 18 (19 if the child is a full-time high school student) or a child at any age who became disabled before the age of 22 in the amount of 50% of the covered worker's PIA.

Taxation of Social Security Benefits

Social Security benefits are subject to federal income tax if the beneficiary files an individual tax return and their annual income is greater than $25,000. If the individual's income is between $25,000 and $34,000, the individual will pay income tax on up to 50% of their Social Security benefits. If the individual's income is over $34,000, the individual will pay income tax on up to 85% of their Social Security benefits. Joint filers will pay federal income tax on their Social Security benefits if their income is greater than $32,000. If the income of the joint return is between $32,000 and $44,000, the couple will pay income tax on up to 50% of their Social Security benefits. If the joint return has an income over $44,000, the couple will pay income tax on up to 85% of their Social Security benefits.

Social Security Payroll Taxes

Social Security payroll taxes are collected from employers, employees, and self-employed individuals. The Social Security payroll tax for employees is 6.2%. Employers must pay a matching 6.2% Social Security tax. Self-employed individuals pay both taxes for a total of 12.4%. In addition, the Medicare Part A payroll tax of 1.45% must be paid by both employees and employers. Self-employed individuals must pay the entire 2.9% Medicare Part A tax. There is a maximum amount of earnings that can be subject to Social Security tax each year. Currently, the maximum taxable wage base is $128,400. This amount is indexed each year to the national average wage index. This maximum applies to employers, employees, and self-employed individuals. Therefore, an employed person earning at least $128,400 or more will pay no more than $7,960.80 in taxes under the current Social Security payroll tax of 6.2%. Medicare Part A taxes are not subject to a maximum taxable wage cap.