To paraphrase Benjamin Franklin, nothing is certain except death and Social Security taxes. As long as you earn a paycheck, or make self-employment money, these taxes are due and payable to the Internal Revenue Service. However, not all income is taxed for Social Security, and there are some limits to how much SS can take.
Payroll and Self-Employment Taxes
Social Security taxes appear on every paycheck at the rate of 4.2 percent of your gross wages in 2012 (your employer paid 6.2 percent in that year). You can ask nicely, but your boss won't grant you an exemption from payroll taxes or change the rate: he's only following IRS rules on withholding. If you're self-employed, you pay your own share of the Social Security tax as well as the employer's share. That's what Form SE (self-employment tax), due on April 15 with the rest of your tax return, is all about.
You'll pay Social Security taxes for the rest of your working life. That'll continue even after you begin drawing Social Security retirement if you keep working. If you earn only interest or dividends, or draw from a retirement savings account, then you can stop paying in to Social Security. The IRS doesn't tax this kind of money for the Social Security trust fund that pays out retirement and disability benefits.
Wage Base Limit
One way to get that Social Security withholding off your check stub is to make a lot of money. There's a built-in "wage base limit" to the plan, which was $110,100 in 2012. The wage base limit exists because benefits are limited, no matter how much you earn during your lifetime. Your employer is supposed to stop the Social Security deduction when you reach this earnings level. If he doesn't, and you make an overpayment, you can claim it as a refund from the IRS. The wage base limit, by the way, applies to each wage earner, so if you and your spouse each make $109,000, both of you will have to pay the Social Security tax on every dollar you earn, even though your combined income is $218,000.
There are a few other circumstances that allow you to escape Social Security taxes. College students working for the school they're studying at don't pay in, nor do members or certain religious orders or sects such as Christian Science practitioners or the Amish. In addition, money earned abroad is Social Security tax-free. An embassy gig might also get you an exemption: employees of foreign governments don't pay Social Security taxes, even if they're working in the United States.
- Ablestock.com/AbleStock.com/Getty Images