Do You Pay Social Security Tax on Retirement Income?

A common question for those nearing retirement concerns the difference between Social Security tax and income tax. These are two separate taxes that apply to different types of income. Understanding this distinction is an important part of managing your finances after you stop working, as Social Security tax is levied on employment earnings, while income tax may apply to your Social Security benefits and other retirement income.

Social Security Tax on Different Income Types

Social Security tax, also known as FICA tax, is a payroll tax on earnings from employment. It combines a 6.2% tax for Social Security and a 1.45% tax for Medicare, totaling 7.65% deducted from a paycheck. For 2025, the Social Security portion of the tax only applies to the first $176,100 of earnings.

The Internal Revenue Service (IRS) defines this “earned income” as wages, salaries, tips, and net earnings from self-employment. In contrast, most forms of retirement income are classified as “unearned income.” This category includes payments from pensions, annuities, and withdrawals from retirement accounts like 401(k)s and Individual Retirement Arrangements (IRAs). Other examples of unearned income are interest and dividends from investments, and these sources are not subject to Social Security tax.

Income Tax on Social Security Benefits

While your retirement distributions are not subject to FICA tax, your Social Security benefits themselves may be subject to federal income tax. Whether you owe income tax on your benefits depends on your “combined income.” The formula for combined income is your Adjusted Gross Income (AGI) plus any nontaxable interest plus 50% of your total Social Security benefits for the year. Your AGI includes taxable income sources like pension payments, IRA distributions, and wages.

Based on this combined income, a portion of your Social Security benefits may become taxable. For an individual filer, if your combined income is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. If your combined income is more than $34,000, up to 85% of your benefits may be taxable.

For married couples filing a joint return, up to 50% of benefits may be taxed for a combined income between $32,000 and $44,000. If the income is above $44,000, up to 85% may be taxed.

Calculating Your Combined Income

To determine if your Social Security benefits are taxable, you must first calculate your combined income. You will need your Social Security Benefit Statement, Form SSA-1099, which details the total benefits you received, along with your AGI and any tax-exempt interest. With these figures, you can perform the calculation.

For example, consider a single individual who receives $20,000 in Social Security benefits and $30,000 from a pension, with no tax-exempt interest. Their AGI is $30,000. To calculate their combined income, they add their AGI ($30,000) to 50% of their Social Security benefits ($10,000), for a total of $40,000. Since this $40,000 combined income is above the $34,000 threshold for single filers, up to 85% of their Social Security benefits would be subject to federal income tax.

State-Level Taxation of Social Security Benefits

Beyond federal income taxes, you must also consider how your state treats Social Security benefits. The rules for state-level taxation vary significantly across the country. A majority of states do not impose an income tax on Social Security benefits, either by providing an exemption or completely excluding the income from state taxation. However, a minority of states do tax these benefits to some extent. The methods these states use can differ from federal rules and from each other, as some might use their own unique income brackets and exemption amounts. Because these regulations can change, it is important for retirees to verify the rules for their particular state with its department of revenue.

Working While Receiving Retirement Income

Many individuals work part-time or return to the workforce after starting to receive Social Security benefits. In this scenario, any wages or salary you earn are classified as earned income and are fully subject to FICA taxes. This new earned income also affects the taxability of your Social Security benefits. The wages you earn are added to your other income sources to calculate your AGI. A higher AGI increases your combined income, which could push you into a tier where 50% or even 85% of your benefits become taxable.

For those who are under their full retirement age, earning income above certain limits can temporarily reduce the amount of Social Security benefits they receive. For 2025, if you are under your full retirement age for the entire year, $1 in benefits is withheld for every $2 you earn above $23,400. This withheld amount is not permanently lost. Your benefits are recalculated and increased once you reach full retirement age to account for the withheld payments.