The Social Security Tax Withholding Question More People Are Asking
When you file for Social Security, the SSA will ask you if you want to withhold 7%, 10%, 12% or 22% from your distributions on Form W-4V.
But there’s usually not much offered by way of explanation -- just four numbers and boxes to check. If you’re wondering how you’re supposed to know which is the right box to check, you’re not alone.
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Read on to find out how much you need to withhold in Social Security taxes in retirement.
Why Social Security Taxation Can Be Confusing
Most people don’t have to worry much about withholding until they’re retiring. Although your employer typically withholds a portion of your paycheck for taxes, that process is generally automatic based on your W-4, unless you choose to modify it yourself.
But when it comes to withholding for retirement benefits, from Social Security to 401(k) and IRA distributions, the burden usually falls on the recipient.
With retirement plan withdrawals, custodians tend to suggest at least 10% withholding by default, per the IRS, but plan participants ultimately get to choose.
But Social Security is more complex because it’s not always taxable. According to the Social Security Administration, if you file as an individual and your combined income is between $25,000 and $34,000, up to 50% of your benefits may be taxed. For incomes above $34,000, as much as 85% can be taxable. For married couples filing jointly, those thresholds are $32,000 and $44,000.
"Combined income" isn't just your Social Security, it's your adjusted gross income plus nontaxable interest plus half your benefits. The right amount to withhold can be a moving target.
The Right Answer Is To Have a Process
The best practice to handle the withholding question is to assess your full situation and then work backward.
First, add up everything taxable. You can’t determine how much tax you have to pay on anything until you know your total taxable income. This includes everything from your pension, IRA and 401(k) income to part-time wages, interest, dividends, rental income, the taxable portion of your Social Security, and income from any other less common sources.
Next, compare that amount to last year. If your income and deductions are roughly similar to a prior, that’s a good baseline you can use to estimate what you might owe this year.
You can also use the safe harbor rule as your target. According to the IRS, you generally avoid an underpayment penalty if your withholding and estimated payments equal at least 90% of what you owe for the current year, or 100% of what you owed the previous year, whichever is smaller. That gives you a concrete number to aim for instead of picking a percentage at random.
Lastly, decide where the withholding comes from. As long as you withhold enough tax to satisfy all of your obligations, it doesn’t matter where it comes from. For example, even if you’re going to owe taxes on your Social Security, you don’t necessarily have to withhold anything. You can pay quarterly estimated taxes directly or withhold the required amount from another source, such as your 401(k) or IRA distributions. The IRS doesn't care which income stream covers the bill, only that the total is enough.
'Guess and Adjust' Isn't a Bad Option Either
If you really have no idea how much tax you should withhold, picking a number somewhere in the middle and adjusting it later isn’t a terrible idea. For example, you might choose to withhold 12% or 22% from your Social Security and see how close you are at year-end. In this scenario, however, you’d want to make sure you had extra cash reserves available in case you get a larger-than-expected bill at tax time.
You can change your mind and submit a new Form W-4V at any time, so don’t worry about getting “locked-in” to a specific withholding percentage for your Social Security. Since you can modify your choices at any time, it’s not a huge financial decision that has lifelong repercussions.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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