Is Social Security Back Pay Taxable?
A lump-sum Social Security payment can create unique tax challenges. Understand the method for attributing this income to prior years to ensure accurate reporting.
Social Security back pay is a lump-sum payment for benefits you were entitled to in prior months or years but did not receive at the time, often due to the disability determination process. This lump-sum amount may be subject to federal income tax depending on your total income for the year. The taxability is determined by the same rules that apply to regular monthly Social Security benefits, which are based on your other income and require specific calculations.
Determining if Your Benefits are Taxable
The taxability of your Social Security benefits, including back pay, depends on your “combined income,” an IRS calculation. Your combined income is your Adjusted Gross Income (AGI) plus any nontaxable interest and 50% of the Social Security benefits you received during the year. Your AGI is your gross income minus certain above-the-line deductions.
After calculating your combined income, you compare it to IRS thresholds. For individuals filing as single, head of household, or qualifying widow(er), a combined income between $25,000 and $34,000 means up to 50% of your benefits may be taxed. If your combined income is over $34,000, up to 85% of your benefits may be taxable.
For married couples filing a joint return, a combined income between $32,000 and $44,000 may result in taxes on up to 50% of your benefits. If your combined income exceeds $44,000, up to 85% of your benefits could be taxed. If Social Security is your only source of income, your benefits are generally not taxable.
How Back Pay is Reported and Taxed
When you receive a lump-sum back payment, the Social Security Administration (SSA) reports the entire amount on Form SSA-1099 for the year the payment was made. You should receive this form by February of the following year. The net benefits shown in Box 5 of this form are used to calculate your potential tax liability.
Receiving several years’ worth of benefits in one tax year can artificially inflate your income, pushing your “combined income” above the taxability thresholds. This can cause a larger portion of your benefits to be taxed than if they had been paid out in the years they were due, resulting in a higher tax bill. To address this, the IRS provides a method that allows you to reallocate the back pay to prior years for calculation purposes.
The Lump-Sum Election Method
To address the tax impact of a large back payment, the IRS permits a lump-sum election. This is a calculation method for your current year’s tax return; you do not amend prior returns. The election allows you to determine the taxability of the back pay by treating the payments as if you received them in the years they were due.
To use this method, you will need your current Form SSA-1099, as the form’s description section typically shows how much of the lump sum is for each prior year. You will also need your tax returns and any previous SSA-1099s for those prior years to find your AGI and previously reported benefits. The goal is to determine if this election results in a lower taxable amount than including the entire lump sum in your current year’s income.
Calculating and Reporting the Tax
The calculation is performed using the worksheets in IRS Publication 915. First, you recalculate the taxable portion of your Social Security benefits for each prior year to which the back pay applies. For a given prior year, add the portion of the back pay assigned to that year to any Social Security benefits you originally received. Using that year’s AGI, you then complete the worksheet to figure out the new, total taxable benefit amount for that past year.
Next, compare this newly calculated taxable amount to the taxable benefit amount you originally reported on that prior year’s tax return. The difference between the two is the additional taxable income from the back pay for that specific year. You must repeat this calculation for every prior year in which you were assigned back pay.
After determining the increase in taxable benefits for each of the past years, you sum these increases together. This total represents the taxable portion of your lump-sum back payment. Add this sum to the taxable portion of your regular, current-year Social Security benefits. The final result is the total amount of taxable Social Security benefits you will report on your current year’s Form 1040. When filing, check the box on the Social Security benefits line of your tax form to indicate you made a lump-sum election.