What to do when excess social security tax is withheld

If you are switching jobs or working two jobs as an employee and your total wages for the calendar year will exceed the social security wage base ($132,900 in 2019), you may be overpaying social security tax.  Unfortunately, you cannot stop the withholding.  However, you will get a credit on your next tax return for any excess withheld.

Each employer is obligated to withhold social security taxes from your wages.  The total they both can withhold may exceed the maximum amount of tax that can be imposed for the year. This amount is $8,239.80 with a 6.20% rate in effect for 2019 and based on the $132,900 wage. If your total withholding is more than that amount, you can recover the excess by claiming a credit for a payment of taxes on your individual tax return for the year.

Example:

E is an employee of ABC, Inc. from January through April 2019, and earns $70,000 during that period. From May through the end of the year, E works for XYZ, Inc. and earns $65,000. ABC withholds $4,340 in social security taxes ($70,000 × 6.20%), and XYZ withholds $4,030 ($65,000 × 6.20%), for a total $8,370 withheld.  This withholding is $130.20 more than the $8,239.80 maximum amount for 2019. On E’s 2019 individual tax return, E will be entitled to claim a credit for a payment of taxes of $130.20.

Although you can recover the excess amount withheld when you file your tax return for the year, as described above, you will not get the benefit of the credit until you file the return that is due in April of the following year. IRS is not required to pay you interest on this amount, so in effect you will have made an interest-free loan to the IRS. If you are separately making estimated tax payments for the year, you may be able to avoid this loss by reducing your estimated payments to reflect the over-withholding. Essentially, you may be able to turn the over-withholding into an estimated payment.

Note that every employer must also withhold a Medicare tax of 1.45% on all wages. Since there is no ceiling on this tax, as there is for the social security tax, you are not entitled to any refund from the amounts your employers withhold.

Please contact us if you would like to discuss this topic further or if you need assistance in working out a revised estimated tax payment schedule due to excess social security tax withholding.