Chris Stein, CFP®
What if I Made Excess Contributions?
A reader has a Social Security question that we're being asked for the very first time, regarding excess contributions made to Social Security.
"I started a new part-time job in addition to my regular job in July of 2019. After reviewing my W2's for 2019, I noticed that my regular employer withheld the maximum Social Security tax amount ($8,239.80) and my new employer (I am a civilian federal employee at this job) withheld $2,236.56. What happens with the excess amount withheld? Do I request a refund? Or, if I do nothing, will that provide me an increased Social Security benefit once I start to draw my Social Security check? Do I need to notify my employer?"
Social Security taxes are only owed on earnings up to a specific limit, which was $132,900 in 2019. (Some other taxes, such as Medicare, don't have a maximum taxable income, so you're taxed on all your earnings.)
The maximum employee portion of the Social Security tax – at the present rate of 6.2% – is $8,239.80. The employer portion is also taxed at 6.2%, so the amount you pay in is matched.
Some people think it's unfair that someone's earnings over $132,900 are not subject to Social Security taxes. They think people who make more should pay on all their earnings. Remember, though, that it's not just the contributions that are capped; people's benefits are capped, too.
As an aside, there are movements in Congress to remove the cap on Social Security contributions and charge on all earnings. But the politicians that are proposing that change want to keep the benefits capped, which would turn Social Security into an income redistribution process instead of a social insurance net.
For now, contributions are capped.
So, in your case, the amount withheld by your regular employer is the amount that you should pay in Social Security taxes in the year 2019 as an employee. If you were self-employed, you would be obligated to pay both sides: the employee part and the employer part. (You would pay in 12.4%.) But that's not your case.
Your new employer withheld an additional $2,236.56 in Social Security taxes.
If you were discussing this year, you could notify your HR department that you had reached your maximum Social Security withholding, and they could stop withholding for the rest of the year. But your question is about 2019 – and that boat has sailed: 2019 is over.
You have had $2,236.56 of Social Security withdrawn above and beyond what you owe. How can you get it back? Do you request a refund? Or could this possibly increase your Social Security benefit?
You definitely cannot increase your Social Security benefit by leaving the excess contribution. That's not how Social Security works. It would be nice if you could say, "Oh, no, just keep it." It would be a way to pay in extra if you wanted to increase your lifelong Social Security benefit. But that's not possible.
But there is a way to get the money back, and it's essentially the way you'd get money back if you overpaid any federal taxes. If the authorities over-collect, you file your tax return. If you don't owe the taxes, they give it back to you.
So, in this particular case, you will handle it by reporting the excess withholding on your Form 1040. For tax year 2019 specifically, the IRS changed the 1040 to 'simplify' it, so things have moved around a little bit. You used to report excess withholdings on Schedule 5, I believe.
But now, in 2019, you'll use Schedule 3, "Additional Credits and Payments," to report that excess amount. Line 11 of that form says, "Excess social security and tier 1 RRTA tax withheld." Enter the $2,236.56 excess contribution there. That excess can then be used to pay income taxes that you owe. If you don't owe enough income taxes to absorb it, then it's as if you over-withheld your income tax withholding, and you'll get that back as an income tax refund.
That's how it's going to come back to you. It's going to be fixed on the 1040, specifically on Schedule 3, line 11. That's your saving grace right there.