ARTICLE | May 16, 2024

As you approach or enter retirement, one of the key decisions you’ll face is whether to set up voluntary withholding for your Social Security payments. This choice can help avoid the stress of unexpected tax bills and simplify your financial planning. 

In this article, we’ll explain how Social Security is taxed and guide you through the process of setting up voluntary withholding. By the end of this discussion, you’ll have the clarity needed to make a decision that best suits your financial landscape, ensuring that you can focus more on enjoying retirement and less on managing your tax obligations. 

Are social security payments taxable? 

Social security benefits may be subject to federal income taxes depending on your total income and filing status. To determine if your benefits are taxable, you’ll need to calculate your combined income, which includes your adjusted gross income and half of your Social Security benefits. 

For single filers, 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. Above $34,000, up to 85% of benefits may be taxable. 

If you’re married filing jointly and your combined income is between $32,000 and $44,000, up to 50% of benefits might be taxed. Above $44,000, up to 85% of benefits can be taxable. 

Why choose voluntary withholding? 

Much like withholding from a paycheck, voluntary withholding simply deducts a certain percentage of your monthly Social Security benefit to cover part or all of your expected federal income tax liability. 

While optional, voluntary withholding can simplify your financial planning. It helps spread out your tax liability over the year, avoiding the burden of lump-sum payments when you file your tax return. 

It also reduces the risk of underpayment penalties. If you expect to owe $1,000 or more when your tax return is filed, you’re generally required to make quarterly estimated tax payments. If you have a tax liability and don’t make quarterly payments or have taxes withheld, the IRS may charge an underpayment penalty. Voluntary withholding can be one way to cover these tax obligations throughout the year, helping to avoid tax penalties by spreading out your tax payments. 

Predictable deductions can also make it easier to manage your monthly budget. By having a predetermined percentage withheld automatically, you can remove the guesswork and variability associated with manual, lump-sum tax payments. Instead of needing to set aside large amounts of money periodically – or facing a substantial tax bill at year’s end – you have a clearer, more consistent view of your actual disposable income each month. This consistent deduction helps you better plan your monthly expenditures, ensuring that your spending aligns with your adjusted income after taxes. This reliability can be particularly valuable for those on a fixed income. 

How to set up voluntary withholding

Setting up voluntary withholding is straightforward. Simply complete a Form W-4V and mail or deliver it to your local Social Security office. Currently, you can choose to have 7%, 10%, 12%, or 22% of your monthly benefit withheld for taxes. 

Selecting the appropriate withholding rate requires a balance of careful calculation and personal judgment. Here are some guidelines to assist you in determining the most suitable withholding rate:

• Estimate your total annual income, including your Social Security benefits, pension payments, earnings from employment, investment income, and any other sources.
• Calculate your taxable social security using the IRS Social Security Benefits Worksheet.
• Determine your expected tax liability for the year using the IRS’s Tax Withholding Estimator or by consulting a tax professional.
• Select an appropriate withholding rate that closely matches your anticipated tax liability. 
• Monitor and adjust your withholding rate as needed. If you find that you are having too much or too little tax withheld, you can adjust by submitting a new Form W-4V.

Ready to simplify your tax management? 

Voluntary withholding is a convenient method to manage the federal income taxes owed on your Social Security benefits. While this article provides a brief overview of the topic, there is more to consider as your financial situation evolves with retirement.

If you’re interested in a deeper understanding or need assistance preparing for changing tax liabilities as a result of your Social Security benefits, please contact our office.