Who Gets a Social Security Tax Exemption?

Reviewed by Chip StapletonFact checked by Suzanne KvilhaugReviewed by Chip StapletonFact checked by Suzanne Kvilhaug

Almost all U.S. workers are required to contribute a portion of their paychecks to the Old Age, Survivors, and Disability Insurance (OASDI) program that most of us know as Social Security. This program is an important source of income for many retirees.

Nearly nine out of 10 Americans ages 65 and older received some income from Social Security as of December 2023, according to the Social Security Administration. About one in eight received 90% or more of their income from this source. Almost 68 million Americans will receive Social Security benefits in 2024.

The OASDI tax that’s noted on your paycheck funds this comprehensive federal benefits program that provides benefits to retired adults and people with disabilities as well as their spouses, children, and survivors. The goal of the program is to partially replace any income that’s lost due to old age, the death of a spouse or qualifying ex-spouse, or because of a disability.

Key Takeaways

• Most U.S. workers are automatically enrolled in the Social Security program, but a few groups are exempt from paying taxes into the Social Security system.
• Members of certain religious groups are often exempt.
• Most foreign academics and researchers are exempt if they’re nonimmigrant and nonresident aliens.
• Self-employed workers who make less than $400 annually do not pay Social Security taxes.
• All individuals are exempt from paying the tax on wages above a certain threshold.

Social Security Benefits

Social Security benefits date back to the days of the Great Depression. The program was created as part of a social safety net designed to reduce poverty and provide care for aging adults and people with disabilities. The program is funded by taxpayer dollars, primarily through payroll deductions.

Most American taxpayers don’t qualify for an exemption from Social Security taxes but exemptions do exist for a small number of people.

The OASDI Tax

The OASDI tax is automatically withheld from employee paychecks at a rate of 6.2%. Your employer is also required to pay a matching 6.2%, making the total tax 12.4%. The Medicare tax is 1.45% each for employees and employers.

The OASDI tax applies to both traditional employees and self-employed individuals, but you’re expected to pay the entire 12.4% tax on your earned income if you’re self-employed. You’re effectively both employer and employee in this case. Self-employed workers are permitted to deduct half of the OASDI tax paid on their annual tax filings, however.

Who Gets Social Security Benefits?

Social Security encompasses several payment programs. They include:

• Direct cash benefits to retirees
• Payments to surviving family members in the event of the enrollee’s death
• Assistance for people with documented disabilities who are unable to continue working

Most people who receive benefits are retirees who paid taxes that supported the program during their careers. They now receive a monthly check. These benefits are provided to workers who have paid Social Security taxes for at least 40 credits, which is 10 years of work.

Social Security is a pay-as-you-go system with current workers covering the costs of benefits that are provided to current recipients. The Social Security program automatically enrolls most U.S. workers. Enrollment is connected to the Social Security numbers (SSNs) of workers and taxpayers.

Who Is Exempt From Paying Social Security?

Members of certain religious groups may be exempt from paying Social Security taxes. They must waive their rights to benefits, including hospital insurance benefits. They must also be a member of a religious sect that’s conscientiously opposed to receiving private death and retirement benefits and provides food, shelter, and medical care to its members.

Most foreign students, scholars, teachers, and researchers are exempt if they’re nonimmigrant and nonresident aliens. Foreign citizens who work in the U.S. for a foreign government such as diplomats or consular officials don’t have to pay in, either. State and local government employees who are covered under a public retirement plan don’t have to pay twice by paying into Social Security as well.

Self-employed workers who make less than $400 annually don’t have to worry about paying Social Security taxes. Individuals are also exempt from paying the tax on any earnings over the $168,600 threshold as of 2024. This earnings limit is adjusted annually to keep pace with inflation.

Important

The Social Security tax rate is 6.2% each for the employee and employer, for a total of 12.4% as of 2024. You must pay both the employee and employer portions if you’re self-employed and have an income of more than $400 per year.

How to Get Exempt Status

Officially joining an exempt group may require an application to the Internal Revenue Service (IRS). Taxpayers who want to qualify for a religious exemption usually have to apply and specifically ask the IRS for an exemption from paying self-employment taxes as well. The IRS regularly grants exemptions to ministers, members of the clergy, and Christian Science practitioners.

Members of religious orders who have taken vows of poverty are exempt from paying self-employment taxes on work performed for the order. They don’t have to request a separate exemption, but taxes would apply if the order elects to be covered under Social Security. Taxes would also apply to any work performed outside of the order.

Who Is Eligible for a Social Security Exemption?

The majority of working Americans must pay Social Security taxes, but there are certain exceptions to this rule. You can be exempt from paying Social Security taxes if you waive the right to any related benefits and meet other conditions. Members of religious orders who take a vow of poverty can also get an exemption.

Can Anyone Opt Out of Social Security?

Few people can opt out of paying into Social Security, but you can if you’re a member of an eligible religious sect or a member of the clergy who has taken a vow of poverty. You must fill out Form 4361 with the Internal Revenue Service (IRS) to qualify.

Can Clergy Opt Out of Social Security?

Yes, clergy can opt out of Social Security. You can do so by filing Form 4361 with the Internal Revenue Service (IRS). Other individuals who can use this form include members of certain religious orders and those who follow Christian Science.

How Many Years Do You Have to Pay Into Social Security to Receive Benefits?

You must have 40 credits to qualify for Social Security retirement benefits, so you must be in the workforce and pay Social Security taxes for at least 10 years. Any credits that you accumulate remain intact if you stop working at any time. New credits are added to the balance when you reenter the workforce.

The Bottom Line

The OASDI tax is withheld from employee paychecks by their employers at a rate of 6.2% to pay for Social Security. Employers pay an additional 6.2% per employee. Self-employed people pay 12.4% because they’re considered both employer and employee. Most U.S. workers are enrolled in the program, but all individuals are exempt from paying the tax on wages above a certain threshold. That income limit is $168,600 in 2024.

A few groups are exempt from paying taxes into the Social Security system. Most foreign academics and researchers are exempt if they’re nonimmigrant and nonresident aliens. Self-employed workers who make less than $400 annually don’t have to pay Social Security taxes, either. Some clergy and members of certain religious orders are also exempt.

Consult a tax professional if you have questions about your status.

Read the original article on Investopedia.