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How Social Security Tax Works

        Money | Taxes

Exceptions and Exemptions

There are certain situations when you don't have to pay Social Security taxes on your income. The most common is when you're retired or disabled, and some portion of your salary comes from Social Security itself. This is where things get a little complicated.

You never pay taxes on more than 85 percent of your Social Security income -- no matter what. So if you received $10,000 in benefits in a year, you'd have to pay 6.2 percent of $8,500. Here's how the tax rate breaks down for different people in different situations:

  • If you file an individual tax return, you could pay taxes on up to 50 percent of your Social Security benefits if your combined income is between $25,000 and $34,000.
  • If you file an individual tax return, you could pay taxes on up to 85 percent of your Social Security benefits if your combined income is more than $34,000.
  • If you and your spouse file a joint tax return, you could pay taxes on up to 50 percent of your Social Security benefits if your combined income is between $32,000 and $44,000.
  • If you and your spouse file a joint tax return, you could pay taxes on up to 85 percent of your Social Security benefits if your combined income is above $44,000.
  • If you're married, but you and your spouse file separate individual tax returns, you could pay taxes on up to 85 percent of your Social Security benefits regardless of income levels.

What's your combined income, anyway? That's your adjusted gross income (income minus tax deductions) plus nontaxable interest (from bonds and other financial instruments) plus 50 percent of your Social Security benefits. This might seem confusing, but just remember that the term "combined income" has nothing to do with whether or not you and your spouse filed individual returns. It's just the sum of all your various sources of income and half of your Social Security benefits.

There are a few other exceptions to Social Security tax laws. Members of certain religious groups don't have to pay, but they don't receive benefits either. Some government employees have their own retirement and insurance systems, so they don't pay into or draw benefits from Social Security. Income below certain earning thresholds isn't subject to the tax, either. The exact amount depends on the job -- it's different for self-employed people, election workers and live-in maids, for example. Many student jobs are exempt, including Federal Work Study jobs and graduate student stipends [source: IRS].

Now that we've talked about taxation, how do you get some of that money back? In the next section, we'll cover Social Security benefits.