Can You Opt Out of Paying Social Security Taxes?
When you received your first paycheck, you were probably in for a rude awakening. You knew you’d have to pay taxes. You likely had no idea how many taxes you really had to pay for living in the United States.
You may have expected to pay federal income taxes and state income taxes.
However, there is another large tax that comes out of almost every paycheck. That’s the Social Security tax.
Many people don’t believe the Social Security system will be around to pay them when they get old. There is evidence that says otherwise but some people still want to opt out of paying Social Security taxes.
So can you opt out of paying Social Security taxes?
And if so, how do you do it?
Here’s what you need to know. But first, it helps to understand the basics of Social Security taxes.
What Are Social Security Taxes?
The Social Security tax, sometimes labeled SS or OASDI (Old Age, Survivors and Disability Insurance) on your paycheck, requires employees to pay 6.2% of their eligible earnings from each paycheck up to a certain cap each year.
This tax is considered a payroll tax because it comes out of your paychecks if you’re an employee.
If you’re self-employed, Social Security and Medicare taxes are combined in the self-employment taxes you pay.
Social Security benefits
After you pay Social Security taxes for a set time, you gain access to Social Security benefits.
The main Social Security benefit everyone thinks of is retirement.
Social Security may also provide access to other benefits.
These include disability benefits, dependent benefits and survivors benefits for surviving spouses or children.
These other benefits usually kick in before you would reach the traditional retirement age if you qualify. They exist to help you in times of dire need.
Who Pays Social Security Taxes?
Employees pay Social Security taxes of 6.2% of their eligible earnings up to a wage limit.
In 2022, the wage limit was $147,700.
If your wages exceed that limit, you stop paying Social Security taxes at that point.
What you might not know is that you are not the only one paying Social Security taxes. Your employer must match the amount you pay.
That adds 6.2% for a total Social Security tax of 12.4%.
If you’re self-employed, you’re responsible for paying both the employee and employer part of Social Security taxes.
That means self-employed people pay 12.4% in Social Security taxes.
The 12.4% Social Security tax is part of the 15.3% self-employment tax. The remaining 2.9% is a Medicare tax.
Ways You Might Be Exempt From Paying Social Security Taxes
It’d be nice if you could opt out of receiving Social Security benefits and not pay the taxes.
Unfortunately, that’s not how it works for most people.
There are certain groups of people that may be able to opt out of paying Social Security taxes.
Doing so isn’t something to take lightly, though.
You must legitimately fall into one of these groups and carefully consider the ramifications.
- Exemption for qualifying religious groups
- Certain nonresident aliens
- Foreign government employees
- Temporary student exemption in certain cases
- Other exemptions
Exemption for Qualifying Religious Groups
Members of certain religious groups may be able to claim a religious exemption.
In order for this exemption to work, your religious group must have been in existence at the end of the year in 1950.
The group must have provided its members with a reasonable standard of living ever since that date. If your group meets these requirements and opposes accepting Social Security benefits, you can apply for an exemption.
To do that, you’ll use IRS Form 4029, Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits.
Certain Nonresident Aliens
Nonresident aliens are not U.S. citizens, but most still have to pay Social Security taxes.
Certain nonresident aliens may be able to avoid paying these taxes, though.
If you’re a temporary foreign student, professor, teacher or another certain educational worker, you may be exempt from paying Social Security taxes.
There are other exemptions like this. They’re usually very specific and based on your circumstances, though.
The IRS website has a list of visa types that may be exempt from Social Security and Medicare taxes.
It also lists when those exemptions apply. If you’re a nonresident alien, check this list and consult a tax professional for more information.
Foreign Government Employees
If you’re an employee of a foreign government you generally don’t have to pay Social Security taxes on income related to your official responsibilities.
You must be working in an official capacity and be working on official business related to your employment to avoid paying these taxes.
A Temporary Student Exemption in Certain Cases
If you’re a student that also happens to work at the same school, you might be exempt from paying Social Security taxes on a temporary basis.
In order to qualify for this exemption, which is only on wages earned from this job, you have to be able to obtain employment only because of your enrollment at the school.
To be clear:
You can’t take advantage of this if you happen to work at the school first.
You must be a student first. Your employment also has to be based on the fact that you remain a student to qualify for this exemption.
There are other rare exemptions from paying Social Security taxes, as well.
Certain firefighters or police officers may not have to pay Social Security tax if they’re part of a qualifying public retirement system.
To find out more about these specific exemptions and if you may qualify for one, consult a tax professional.
What If You Don’t Pay Your Social Security Taxes?
If you have a legitimate option to opt out of paying Social Security benefits and you do so properly, not paying your taxes would result in not receiving any Social Security benefits.
If you don’t have a legitimate option to opt out of paying Social Security taxes, you likely can’t avoid paying this tax as an employee.
Employers are required to withhold Social Security tax from your paychecks. Unlike the federal income tax, you can’t tell your employer how much to withhold for Social Security taxes.
This means you’ll likely end up paying Social Security taxes as an employee whether you want to or not. Of course, this does not include any legitimate exemptions.
As a self-employed person, it is possible that you do not properly report or pay your self-employment taxes which includes Social Security tax. If you do this, you could get in a lot of financial trouble.
If you don’t report the income at all, the IRS can file a return on your behalf for the missing income. This return will not include any deductions you may be entitled to, so you could actually end up owing more than you would have if you filed your return on your own.
When you don’t pay on time, you will likely be subject to penalties and interest. There are penalties for not filing a return and higher penalties for fraudulently failing to file your return.
The IRS can take steps to collect the money they think you owe, too. They can garnish wages if you have W-2 wages. They can also seize your bank accounts, other property, Social Security benefits and other income.
The worst part is, failing to properly report self-employment earnings and taxes may result in lower Social Security benefits, too.
Why You’re Probably Better Off Paying Social Security Taxes Anyway
Let’s be honest:
It’s hard to save and invest money.
If you opt out of Social Security benefits, you’ll need to save and invest to replace that benefit in the future. Otherwise, you could be left with no income if you’re ever unable to work.
While you might have the best intentions of taking the money you would have paid toward Social Security and investing it, that won’t always happen.
Your car may need to be replaced unexpectedly. An expensive medical emergency may pop up. Without having that 6.2% deducted automatically from your paycheck, that money may end up going toward these other expenses.
Before you know it, you could get used to spending the money every month. Then, you put off saving and investing to cover your retirement needs until it’s too late.
Social Security benefits won’t likely allow you to live a lavish lifestyle in retirement. Even so, the benefit can help you survive financially.
It can be inconvenient to pay 6.2% of the majority of your earnings to this tax every year. The inconvenience provides a safety net for you once you reach retirement age.
Without that safety net, many people would end up completely broke.
Consult a Professional
If you think you may qualify for an exemption from paying Social Security taxes you should consult a tax professional.
A tax professional can help you determine your specific situation. They can also educate you on the benefits you would be giving up.
Opting out of Social Security may not seem like a big deal to now.
Sadly, it could have disastrous effects when you reach retirement and need the Social Security benefits to help you.