The government imposes federal taxes to pay for the Social Security program, but unlike federal income taxes, which apply to a wide variety of income sources, Social Security tax applies only to the first $110,100 of your earned income as of 2012. Earned income generally includes wages, salaries, tips and self-employment income. So-called "passive income" is not subject to Social Security tax.
Social Security Benefits
The Social Security program provides retirement income to workers that contributed to the program during their working lives and to people with disabilities. Social Security benefits are not subject to Social Security tax. A portion of Social Security benefits may be subject to income taxes, depending on your annual income. If Social Security benefits are your only income source, however, you don't pay any taxes on your benefits.
Interest and Dividends
Interest and dividends are forms of passive income that are not subject to Social Security tax. Interest and dividends you receive during the year -- unless earned in a special tax-deferred account such as an IRA -- are subject to federal income taxes. Certain dividends, called qualified dividends, are taxed at maximum rate of 15 percent. You must hold a stock at least 60 days during the 121-day period that begins 60 days before a stock's ex-dividend date for a dividend paid on the stock to count as qualified. The ex-dividend date is the first day new investors are not entitled to receive the next dividend payment.
Pensions and distributions from 401(k) plans, IRAs and annuities are not subject to Social Security tax. Retirement income may or may not be subject to income taxes depending on the type of income. For example, withdrawals from 401(k) plans are subject to income taxes if you funded the 401(k) with pretax dollars, but withdrawals from Roth IRAs are generally not subject to any taxes.
Prizes and Gifts
Prizes, awards and gifts can provide substantial and potentially unexpected windfalls that are not subject to Social Security tax. Prizes and awards are generally included in your taxable income for federal income taxes, but gifts received from friends and family are not subject to income taxes. Small awards of tangible property received in recognition for work achievements, such as length of service or meeting safety goals, are nontaxable fringe benefits.
Children and Divorce
Getting divorced or separated can result in alimony payments, child support payments or both. Child support and alimony are forms of unearned income that are not subject to Social Security tax. Alimony is subject to federal income tax, but child support is not subject to federal income tax. Assets you leave behind to your heirs or that you receive as inheritance is not subject to Social Security tax.
- Internal Revenue Service: What Is Earned Income?
- Social Security Administration: What Is Unearned Income?
- Social Security Administration: Benefits Planner: Maximum Taxable Earnings (1937 - 2012)
- CNN Money: What Is FICA?
- Internal Revenue Service: Are Your Social Security Benefits Taxable?
- Internal Revenue Service: Investment Income
- Internal Revenue Service: Employee Achievement Awards
Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.