Social Security or Federal Insurance Contributions Act (FICA) taxes provide retirement, disability, survivor and Medicare benefits for the worker's future. FICA taxes make no distinction between the active or retired worker. If you are in the 96 percent of workers who pay into Social Security, you pay a percentage of your earned income into the system. You do not pay Social Security taxes on unearned income.
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Individuals working for wages or salary, or working as independent contractors, pay FICA taxes on the money they make. This includes retirees collecting Social Security benefits who continue to work at another job. The Social Security system works on a trust fund and your tax payments do not accrue for you alone. You pay for others to collect benefits in future years. You pay FICA taxes for so long as you work.
If you receive pension benefits or Social Security, you do not pay FICA taxes on this unearned income. Interest, dividends and similar income are unearned income, excluded from FICA taxes as well.
FICA taxes break down into two main categories -- Social Security and Medicare. The Social Security tax rate in 2012 is 4.2 percent for the individual taxpayer and 6.2 percent for the employer. The Medicare tax rate is 1.45 for the employee and 1.45 for the employer. You pay 5.65 percent tax on your income in 2012. If you are an independent contractor or employer, you pay 7.65 percent combined tax for Social Security and Medicare. As an independent contractor or a self-employed individual, you pay both the 7.65 percent and the 5.65, for a total of 13.3 percent in 2012.
Federal Income Taxes
In addition to FICA taxes, retirees also pay federal income taxes. Federal income taxes do not exclude unearned income and you may pay income tax on Social Security benefits, depending on your combined income calculations. Calculate combined income by adding 50 percent of your Social Security benefits to your adjusted gross income. Add your nontaxable interest income, like municipal bonds, to get your combined income. Taxation of benefits starts at combined income of $25,000 for a single filer and $32,000 for married filing jointly. The Internal Revenue Service taxes 50 percent of Social Security benefits in this tier. The IRS taxes 85 percent of Social Security benefits for retirees with income over $34,000 as a single filer or $44,000 as a joint filer.