cheap wholesale dreambox: How Social Security Tax Works

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

To qualify for full Social Security retirement benefits, you need to have at least 10 credits in the Social Security system. How do you earn credits? You earn one for each quarterly period that you work and contribute to the system, but there's a minimum amount you must earn to receive the credit. The amount changes each year. The minimum amount needed to earn a credit in a quarter in 2010 was $1,120. To get the yearly maximum of four credits, you need to have earned $4,480 in 2009. Note that the term "quarter" is somewhat archaic, since the government doesn't count separate quarters anymore. Your income is counted for the entire year, and you get one credit for each $1,120 you earn, up to a maximum of four credits each year. It doesn't matter when in the year you earned that income. If you make $5,000 in January, you'll still get four credits for that year. If for some reason you need to collect Social Security before you have a full 10 credits, you may get some reduced benefits.

How much will you receive in retirement benefits? The amount is first based on your average wagesover the 35 years of your life in which you earned the most, adjusted for inflation. It's then adjusted based on when you retire. You can retire as early as age 62, but you'll receive reduced benefits. You have to reach full retirement age to get the full benefits -- this age is between 65 and 67, depending on when you were born. You can even delay retirement beyond full retirement age to get increased benefits [source: socialsecurity.gov].

If you're wondering how many credits you have, the Social Security Administration sends an annual statement to everyone over the age of 25 who has paid into the system. It will explain how many credits you have earned so far, what your benefits would be under your current number of credits and your earnings for each year you've paid into the system. If you're already retired and receiving Social Security benefits, your statement serves another important function: It shows you the exact benefits you received in a given year, which you can use to calculate your combined income.