The Social Security Tax Oversight Retirees on Reddit Say to Watch For, Plus an Expert’s Advice

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Social Security benefits can be taxed, but federal income tax is not automatically taken out of each payment. Many new beneficiaries do not realize this until a surprise tax bill arrives.

That is the caution one retiree recently shared in a Reddit post. Below is the Social Security tax mistake readers are being warned about, along with what experts recommend.

The Social Security Tax Mistake One Reddit User Pointed Out

In one Reddit discussion about applying for Social Security, a commenter advised other retirees not to overlook tax withholding: “Don’t forget to take federal tax out! I set mine for 10%.”

The commenter noted that income from sources such as traditional IRAs, 401(k) plans and capital gains can influence whether Social Security benefits are taxable. While some states do not tax Social Security income, federal income tax can still apply.

“People assume Social Security works like their old paycheck did — taxes just come out, done. It doesn't work that way,” said Leandre Boone, founder of Buckeye Financial.

According to the Social Security Administration (SSA), as much as 85% of benefits can be taxable if an individual files a return and combined income is above $25,000, or if a married couple files jointly and combined income is above $32,000.

That means up to 85% of the benefits may be taxable, not that the tax rate is 85%.

“We do have to explain to some clients how it's not 85% tax rate, but rather 85% of their Social Security income included in their taxable income and then taxed at their marginal income tax rate,” said Caleb Moyer, owner of Moyer Tax Services, an Omaha, Nebraska-based tax preparation firm.

What Can Happen If Too Little Is Withheld?

If not enough tax is withheld, Boone said the result is usually one of two things: “A big check written at tax time, or an underpayment penalty stacked on top. Neither is fun.”

Moyer also pointed out that withholding does not have to come from Social Security alone. Someone receiving benefits along with a pension or retirement account distributions may decide to withhold more tax from those other income sources instead.

That can offer more flexibility because Social Security allows federal withholding only at set rates of 7%, 10%, 12% or 22%, Moyer said. In other words, a retiree could have no federal tax withheld from Social Security and still withhold enough from other income to cover the total tax due.

The key is making sure enough is paid in during the year.

“If your income puts your benefits in taxable territory and you skip setting up withholding, you're racking up a tax bill all year without knowing it,” Boone noted. “Then April hits and it's a gut punch.”

Ways To Prevent a Surprise Tax Bill

If you want taxes withheld directly from your benefits, Boone said you can submit Form W-4V, the Voluntary Withholding Request, to the SSA.

“You pick a percentage: 7, 10, 12 or 22. It comes out of your benefit gradually instead of hitting all at once,” he explained. You can also make quarterly estimated payments.

“Either route, the real move is doing the math before the benefits start — not guessing, actually figuring out how much of your income will be taxable and picking a number that covers it,” Boone advised.

As Moyer noted, another option is to increase withholding from other income sources.

“Ultimately, the goal is to pay in enough throughout the year to avoid 'tipping' the government by having to pay more in taxes because of interest or penalties,” Moyer said.

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