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Social Security (SS), Supplemental Security Income (SSI), and Social Security Disability Benefits (SSDI) are three government benefit programs that can provide income to Americans who are unable to work. SS, SSI and SDI are all administered by the Social Security Administration.
However, each of these programs has different purposes and admission requirements. However, when it comes to taxes and financial aid, it can be confusing to understand how each element works. For example, do you need to include SSDI benefits from the FAFSA?
But how exactly do these programs work? And what impact do they have on your tax bill? In this article, we'll look at each one and its impact on your paycheck, taxes, and FAFSA.
What is Social Security (SSA)?
The Social Security (SS) tax is part of a group of payroll taxes mandated by FICA (the Federal Insurance Contributions Act). One component is the Social Security tax (or Old Age, Survivors and Disability Insurance) and the other component is the Medicare tax. These FICA taxes fund your retirement and disability benefits.
When people talk about Social Security (or SS), they are usually referring to Social Security retirement benefits.
Related: What young investors should know about Social Security
How Social Security (SSA) contributions affect your taxes
The social security tax rate is 6.2% for the employee and the same tax rate for the employer, for a total of 12.4%. As a self-employed person you must pay the full 12.4%. For this reason, hiring contractors is beneficial for businesses as they do not have to pay social security taxes or payroll overheads.
The amount paid by Social Security reduces your taxable income. For example, if you make $100,000, $6,200 will be paid in Social Security taxes, leaving $93,800 subject to federal and state taxes. Social Security taxes apply to the first $168,600 of wages in 2024. The $168,600 limit is called the wage base.
The Medicare tax is split the same way: 1.45% is paid by the employee and the same amount by the employer, for a total of 2.9%. This means your combined FICA tax rate is 7.65%. The maximum Social Security portion of these taxes in 2024 is $10,453.20.
Related: FICA taxes
How Social Security benefits affect your taxes
Once you receive Social Security benefits, these payments may be taxable depending on your total income and filing status.
For single filers with total income of less than $25,000, SS benefits are not taxed. For income between $25,000 and $34,000, benefits are taxed at 50%. For income over $44,000, benefits are taxed at 85%.
Although it is not a Social Security tax, the Additional Medicare Tax (AMT) applies to those earning more than $200,000. AMT is taxed at a rate of 0.9%.
Visit the College Investor Tax Center for more tax advice and support.
How Social Security Benefits Affect FAFSA
Yes, Social Security benefits impact the FAFSA. You must report any taxable Social Security benefits you received – they just fall into your taxable income on your FAFSA. You not Report untaxed social security benefits. Social security benefits are subject to tax at a maximum of 85%.
What about Social Security survivor benefits and FAFSA?
Nontaxable Social Security survivor benefits are not reported on the FAFSA. In the rare event that survivor benefits are taxable based on the recipient's adjusted gross income, the taxable portion is reported on the FAFSA.
What is Supplemental Security Income (SSI)?
Supplemental Social Security Income (SSI) is not a tax. Instead, it is disability income paid to those who qualify for SSI benefits. SSI benefits are also not taxed. However, in some cases, SSI recipients may be required to report their SSI income on their tax return.
Supplemental Security Income (SSI) eligibility requirements.
To be eligible for SSI, you generally must be at least 65 years old and have a disability. Children are also eligible for SSI. SSI is paid monthly through Medicaid. The amount is based on need (i.e. “means-tested program”).
SSI is aimed at people with low incomes and very few assets. If the Social Security Administration determines that the value of all your personal property and assets exceeds $2,000 for an individual or $3,000 for a couple (not counting your car and home), you are generally not eligible for SSI.
Supplemental Security Income (SSI) benefit limits.
SSI amounts vary by individual and have a maximum monthly amount set by the Social Security Administration. For 2020 these amounts are:
- $783 for an eligible individual
- $1,175 for an eligible individual with an eligible spouse
- $392 for a significant other.
SSI benefits increase in line with the cost of living.
Is SSI reported on the FAFSA?
SSI payments are not taxable income and are NOT reported on the FAFSA.
What are Social Security Disability Benefits (SSDI)?
Social Security Disability Benefits (SSDI) is another disability program. Many people lump the two together and simply call it Social Security disability benefits. However, the main difference between them lies in their admission requirements.
If SSI is means-tested, SSDI eligibility is determined based on your work credits. Additionally, SSI is funded by general fund taxes, while SSDI is funded by the Medicare portion of the Social Security trust fund.
The idea behind SSDI is to provide income to disabled people who have paid into the Social Security program but are not yet old enough to start receiving SS benefits. So while SSI requires recipients to be at least 65 years old, Must be SSDI recipients under the age of 65.
SSDI recipients contribute to the Social Security trust fund while they work. Your contributions come in the form of FICA Social Security taxes. The prerequisite for SSDI qualification is the existence of sufficient work performance.
Because of income limitations, most people who receive SSDI do not pay federal income tax on the money they receive. And most states don't tax SSDI benefits at all.
What are work credits?
Work credits are based on earnings. In 2024, $1,7300 each will be converted into a work credit. The maximum number of credits you can earn in 2024 is four ($6,920 in earnings). There are two tests that determine how much SSDI you will receive. These are the:
- Current work test and the
- Duration of the work test
Without going into too much detail, the more years you have worked, the more credits you will need. However, if you haven't earned enough work credits to qualify for SSDI, you can still qualify for SSI.
Is SSDI reported on the FAFSA?
SSDI benefits are reported on the FAFSA only if they are taxable to the recipient. Most beneficiaries who receive SSDI are subject to income limitations, so the benefits are not taxable. In this case, they will also not be reported on the FAFSA.
In the rare cases where benefits are taxable, only the taxable amount will be reported on the FAFSA.
Final thoughts
To recap: Both Social Security (SS) and SSDI (Social Security Disability Benefits) are funded by FICA taxes and paid through the Social Security Trust Fund. You can begin receiving your Social Security (SS) retirement benefits at age 62. However, if you become disabled before reaching retirement age, you may be eligible for SSDI benefits.
SSI is also a disability benefit. However, with Supplemental Security Income (SSI), you must demonstrate financial need to qualify, and you typically must be at least 65 years old or older. Any of these programs can help ease your financial burden when you are unable to work. However, your maximum benefits are also limited by your needs or the amount you pay.
To further protect your income during a short or long period of disability, consider purchasing disability insurance from a site like Policygenius or Breeze. You can also check out our complete guide to disability insurance.
And given the instability of government programs, you should open a retirement account and save and invest as if you were fully self-funding your retirement. When you receive Social Security benefits, they are “extra” money that you can use as you wish. Read our complete guide to saving for retirement.
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