3 ways you can recoup Social Security overpayments

It’s a common mistake: You might overpay the Social Security tax due to a change in jobs, self-employment or other circumstances. Worst of all, overpayments frequently go undetected.

Strategy: Review your employment tax status. If you find that you overpaid Social Security tax in 2008, you’re eligible for some timely tax relief.

For 2008, the employee’s portion of Social Security tax is equal to 6.2% of the first $102,000 of wages (increasing to $106,800 for 2009). The employee’s Medicare tax portion is 1.45% on all wages. Together, these two taxes comprise the employee’s portion of the FICA tax. For example, someone who has annual wages of $150,000 owes $8,499 in Social Security tax for 2008 . The percentages are doubled for self-employment tax.

Here are three options for recovering excess Social Security tax paid last year:

1. Claim a credit. You might accidentally overpay Social Security tax if you worked for more than one employer during the year. But the onus is on you to request a credit on the 2008 tax return. The credit is claimed on Line 65, Form 1040.

2. Obtain a corporate refund. When you’re preparing your tax return, you may notice that your employer mistakenly withheld more Social Security tax than required, even though you worked for the same company all year. In that case, you can’t take a credit on Form 1040. The employer must provide an adjustment. For instance, if the company withheld $500 more than it was supposed to, you may arrange to receive a one-time $500 increase in the next paycheck.

3. Offset self-employment tax with job wages. If you run a self-employed business in addition to holding down a regular job, you can use Social Security tax withheld from wages to reduce the resulting self-employment tax liability.

Example: You made $102,000 from your full-time job in 2008 and also netted $25,000 of self-employment income from a sideline business. Although the Medicare tax applies to all wages and self-employment income, only the first $102,000 of wages and self-employment income is subject to the Social Security tax. So the total self-employment tax that you owe is limited to $725 (2.9% of $25,000).

Tip: Remember that half of the self-employment tax is deductible on Line 27, Form 1040.