Social Security Tax Limit

The social security tax is a tax levied on employers and employees in the United States to fund the Social, however, certain purity program. The Social Security tax is collected through either a payroll tax mandated by the Federal Insurance Contributions Act (FICA) or a self-employment tax mandated by the Self-Employed Contributions Act (SECA).

The Social Security tax pays for the retirement, disability, and survivorship benefits millions of Americans receive each year through the Old-Age, Survivors, and Disability Insurance (OASDI) Program, the official Social Security name. If you’re still not familiar with the social security tax’s ins and outs, let’s delve a little deeper and learn more about it.

How the social security tax works

Employees and self-employed taxpayers are subject to the Social Security tax. Employers typically deduct this tax from their employee’s paychecks and submit it to the government. The funds collected from employees for Social Security are not held in trust for the individual employee who is currently contributing to the fund. Still, they are instead used to pay older people in a “pay-as-you-go” system.

The Social Security tax is also collected to help people who are entitled to survivorship benefits, which are payments made to a surviving spouse after the death of a spouse or to a dependent child after the death of a parent.

The Social Security tax rate is 12.4 percent as of 2021. Half of the tax, or 6.2 percent, is paid by the employer, with the employee responsible for the other half. The Social Security tax rate is applied to all types of employee income, including salaries, wages, and bonuses. There is, however, an income limit above which the tax rate is applied. For 2021, the Social Security tax is deducted from earnings up to an annual limit of $142,800; earnings above this limit are not subject to the Social Security tax.

Social security tax for self-employed

Self-employed earnings is also  subject to Social Security taxes. Because the IRS considers a self-employed person to be both an employer and an employee, they must pay the full 12.4 percent Social Security tax. All net earnings up to the wage limit are subject to the Social Security tax. The self-employment tax combines the Social Security and Medicare taxes. The self-employment tax is 15.3 percent as of 2021 (12.4 percent Social Security tax + 2.9 percent Medicare tax). Only 92.35 percent of net business earnings are subject to self-employment tax.

Here’s an example: John, who runs a human resources consulting business, calculates his total net income for the year to be $200,000 after business expenses have been deducted. His self-employment tax rate will be assessed on 92.35% x $200,000 = $184,700. Since this amount is above the capped limit, his tax bill will be 15.3% x $137,700 (limit) = $21,068.01. Ike can claim an above-the-line deduction for half of his self-employment tax, or $21,068.01 ÷ 2 = $10,534.05. In effect, he gets a refund on the employer portion (6.2% Social Security + 1.45% Medicare = 7.65%) of his self-employment tax.

Who is exempt from paying social security taxes?

Regardless of whether they work for an employer or are self-employed, most taxpayers must pay Social Security taxes on their earnings. However, certain groups of American taxpayers are exempt from paying Social Security taxes.

Qualifying religious

Certain religious groups are exempt from Social Security taxes if they are officially opposed to Social Security benefits such as retirement, disability, and deaths. Exemption requirements include demonstrating that the religious organization has been in existence since December 31, 1950, and that it has consistently provided a decent standard of living to its members since that time. Religious organizations that want to be exempt must fill out Form 4029. Individuals who have previously been eligible for Social Security benefits will not be exempt.

Non-resident alien

Non-resident aliens (those who are not U.S. residents or citizens) may be exempt based on the type of visa they have. International students, educational professionals, and non-residents working for a foreign government official are examples of non-resident aliens who may be exempt.

Temporary student

Current students who get a job at their university are eligible for a Social Security tax exemption on the income they earn from those jobs (as long as they are still enrolled at the university). Employees of the university who use their employee benefits to enroll do not qualify.

Foreign government employees

Individuals who work for a foreign government in an official capacity on official business may be exempt from Social Security taxes. Its employees, spouses, and children are only eligible if they work for a foreign government.

What is the social security withholding for 2022?

Since 1990, the OASDI tax rate—or the Social Security tax—has been 6.2%. So, in 2022, the Social Security withholding rate will be 6.2%.

How much is social security income taxable?

If you file your federal income taxes as a single person, and your combined income is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. If your combined income is more than $34,000, up to 85% of your benefits may be taxable. If your combined income is below $25,000, all of your Social Security income is tax-free.

If you are married and file a joint return, and you and your spouse have a combined income between $32,000 and $44,000, you may have to pay income tax on up to 50% of your Benefits. If your combined income is more than $44,000, up to 85% of your benefits may be taxable. If your combined income is below $32,000, all of your Social Security income is tax-free.

Finally, if you are married and file a separate tax return, you will almost certainly be required to pay taxes on your benefits. If you receive Social Security benefits, you will receive a Form SSA-1099, Social Security Benefit Statement, every January. This form will show the number of benefits you received in the previous year, and you can use this information to determine whether your benefits are taxed when you file your tax return.

Example of social security taxes

Finally, if you are married and file a separate tax return, you will almost certainly be required to pay taxes on your benefits. If you receive Social Security benefits, you will receive a Form SSA-1099, Social Security Benefit Statement, every January. This form will show the number of benefits you received in the previous year, and you can use this information to determine whether your benefits are taxed when you file your tax return.

On the other hand, Jacob has a taxable income of $175,000 for 2020. The Social Security tax rate will only be applied up to the $137,700 limit (the Social Security tax limit for 2020 is $137,700; the limit increased to $142,800 in 2021). As a result, Jacob will contribute 6.2 percent x $137,700 = $8,537.40 to the country’s Social Security account for the elderly and disabled, but his effective Social Security tax rate is $8,537.40 $175,000 = 4.87 percent. Izzy, who has a lower annual income, is effectively taxed at 6.2 percent (i.e., $5,270- $85,000).

Even if a household earns a level of income subject to little to no federal income tax, the Social Security tax may still be deducted from their pay. A single taxpayer who earns $10,000 gross income in a given year, for example, will have zero income tax liability, but 6.2% may still be taken for Social Security.

Social security tax limits

The annual Social Security tax limits are determined by changes in the National Wage Index (NAWI), which tends to rise each year. The modifications are designed to keep Social Security benefits in line with current inflation.

Any income you earn above the wage cap is exempt from the 6.2 percent Social Security payroll tax. For example, in 2022, an employee earning $165,000 will pay $9,114 in Social Security taxes ($147,000 x 6.2 percent).

However, keep in mind that there is no wage base limit for Medicare tax. While the employee is only required to pay Social Security tax on the first $147,00, they must pay 1.45 percent Medicare tax on the entire $165,000. Workers earning more than $200,000 in 2022 will also be subject to an additional 0.9 percent Medicare tax.

The combination of the increased Social Security tax limit and the additional Medicare tax for high-income earners may result in lower take-home pay. Unfortunately, this means that workers who earned more than $200,000 in 2021 may owe more taxes in 2022.

Here’s how the Social Security limit will work in 2021 and 2022:

Change in taxes paid from 2021 to 2022.

History of social security tax limits

The Social Security tax rate rarely changes—employees have been paying 6.2% since 1990. However, unlike the tax rate, the Social Security tax limit is adjusted annually. The federal government increased the Social Security tax limit in 10 out of 11 years. The largest increases were in 2020 and 2021, when the limit increased by 3.6% and 3.7%, respectively. In 2022, the increase will be 2.9%.

Cost-of-living adjustment (COLA)

The COLA is an annual increase in Social Security benefits. It is measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers published by the U.S. Department of Labor (CPI-W). Beginning in 1975, when inflation rates were extremely high, Congress instituted annual COLA adjustments.

For 2022, the COLA is 5.9 percent. This means that approximately 70 million Social Security recipients will see an increase in their monthly payments.

The 5.9 percent increase is a significant difference from previous years. Individuals will receive an average of $1,657 in SSA benefits in 2022, while couples will receive an average of $2,753 due to the COLA increase.

Retirement earnings test exempt amounts

Workers who receive benefits before reaching full retirement age (FRA) must pass the retirement earnings test. Social Security will withhold benefits until you reach FRA if you earn more than a certain amount. Like the Social Security tax limit, these thresholds are typically adjusted annually by the national wage index.

There are two annual earnings test exempt amounts: one for individuals under retirement age and one for individuals who reach FRA during that year. Social Security withholds $1 for every $2 over the exempt amount for younger recipients. Individuals reaching retirement age will have $1 withheld for every $3 over their exempt amount.

In 2022, the earnings test exemption amounts will increase to

• $19,560 for individuals younger than the FRA
• $51,960 for those who reach their FRA.

In other words, an individual who earns $19,560 ($51,960) or less in 2022 may be eligible to receive full Social Security benefits. This is up from $18,960 ($50,520) in 2021.

How is the social security tax calculated?

The Old-Age, Survivors, and Disability Insurance Program (OASDI) tax, also known as the Social Security tax, is calculated by deducting a fixed percentage of your income from each paycheck. Each year, the Social Security tax rates are set by law and apply to both employees and employers.

The Social Security tax rate for employees and employers is 6.2 percent of employee compensation, for a total of 12.4 percent in 2021 and 2022. Self-employed individuals must pay the full 12.4 percent.

The Federal Insurance Contributions Act refers to the combined taxes withheld for Social Security and Medicare (FICA). Social Security taxes are denoted as OASDI on your pay statement, and Medicare is denoted as Fed Med/EE. Social Security and Medicare are federal programs that offer benefits to retirees, people with disabilities, and children of deceased workers.

Social security tax rates

Social Security benefits retirees and those otherwise unable to work due to illness or disability. Social Security is frequently the only source of consistent income for people who cannot work, particularly those with modest earnings histories.

Because Social Security is a government program designed to provide a safety net for working citizens. It is funded by a simple withholding tax that deducts a fixed percentage of pretax income from each paycheck. Workers who have contributed for at least ten years are eligible to collect benefits based on their earnings history when they retire or become disabled.

Social Security benefits are capped at a maximum monthly benefit amount based on earnings history. A tax cap limits the number of annual wages or earned income that can be taxed to prevent workers from paying more in taxes than they can later receive in benefits.

The maximum income subject to the OASDI tax in 2021 is $142,800, with the maximum annual employee contribution set at $8,853.60. The maximum amount of income subject in 2022 is $147,000, with a maximum annual employee contribution of $9,114.00. Congress determines the amount, which can vary from year to year.

The wage limit is annually adjusted for inflation and is available in IRS Publication 15 for most employees and Publication 51 for agricultural workers. According to IRS Publication 15, Wages subject to FICA include all income received for services performed unless specifically excluded. The payment does not have to be made in cash or by check.

Salaries, bonuses, commissions, and paid vacation or sick time are all examples of wages. Unless the employee is a household or agricultural worker, in-kind payments in goods, lodging, food, clothing, or services are also included.

Contributions to a qualified retirement plan made voluntarily are also subject to FICA. Accident or health insurance premiums paid by an employer for an employee, including the employee’s spouse and dependents, are not wages and are not subject to FICA. Employer contributions to Health Savings Accounts (HSAs) are also not considered wages.

Jeff, for example, earns $20,000 per year. He chooses to contribute $4,000 to his 401(k), and his employer matches 25%, or $1,000. His Social Security wages are $20,000, but his elective deferral contribution is still subject to FICA, while the employer’s additional contribution is not. The Social Security tax deducted from his paycheck is $1,240 ($20,000 x 6.2%).

If a person earns more than the Social Security tax cap from more than one employer, they may end up paying more taxes than necessary. When there is an overpayment, the amount is either applied to the individual’s federal tax bill or refunded. Each employer must still match the tax contribution, but they do not receive a refund even if they become aware of the overpayment.

Are spousal, survivor, disability, and SSI benefits taxable?

These programs all follow the same general rules as the Social Security program for retirees, with one exception: Supplemental Security Income (SSI)

Spousal benefits

If you do not have your own Social Security benefits but receive spousal Social Security benefits based on your marital partner’s benefits, the rules are the same as for all other Social Security recipients. If your income exceeds $25,000, you will be taxed on up to 50% of the benefit amount. If your income exceeds $34,000, the percentage rises to 85 percent.

Survivor benefits

If you do not have your own Social Security benefits but receive spousal Social Security benefits based on your marital partner’s benefits, the rules are the same as for all other Social Security recipients. If your income exceeds $25,000, you will be taxed on up to 50% of the benefit amount. If your income exceeds $34,000, the percentage rises to 85 percent.

Disability benefits

Social Security disability benefits are taxed in the same way as Social Security retiree benefits. Benefits are taxable if the recipient’s gross income exceeds a certain threshold. The current exemption amount is $25,000 for an individual and $32,000 for a married couple filing jointly.

What is the taxable wage base?

The maximum amount of earned income on which employees must pay Social Security taxes is the taxable wage base. The employee’s gross wages will equal the taxable wage base in most cases. An employer will typically handle this calculation and withhold the appropriate amount of taxes from each employee’s paycheck; however, the employee is still responsible for reporting the tax on their tax return each year. The Social Security wage base is another name for the taxable wage base.

Social Security taxes are levied at a rate of 12.4 percent. The employer pays half of the tax, which amounts to 6.2 percent, and the employee is responsible for the other half. However, the Social Security tax is only levied on earnings up to a certain amount. Wages, salaries, and bonuses in excess of the specified maximum earnings amount are not taxable. The limit is adjusted annually by changes in the national average wage index.

How to lower your social security taxes?

For those taxed on their Social Security benefits, there are several options. The most obvious solution is to reduce or eliminate interest and dividends in the provisional income formula. As a result, converting the reportable investment income into tax-deferred income, such as an annuity, which will not appear on the 1040 Form until it is withdrawn, could be a solution. If you have $200,000 in certificates of deposit (CDs) earning 3%, that equates to $6,000 per year, that will be considered provisional income.

When computing provisional income, the same $200,000 growing inside an annuity with interest reinvested back into the annuity will effectively yield a reportable interest of $0 when the interest is reinvested back into the annuity.

Annuities, in general, become taxable income when distributed, depending on the account type. As a result, virtually any investor who does not spend all of the interest earned on a CD or other taxable instrument can benefit from transferring at least a portion of their assets to a tax-deferred investment or account. Another option is to simply work fewer hours, especially if you are at or near the threshold for having your benefits taxed.

How much of your social security is taxable after reaching retirement age?

Notably, after retirement, 85 percent of your Social Security benefits may be taxable. How much of your benefits are taxed depends on your income at the time. If you file as an individual and your income is between $25,000 and $34,000, you will be taxed on half of your benefits. If you earn more than $34,000, 85 percent of your benefits will be taxed. If you are married filing jointly, and your combined income with your spouse is between $32,000 and $44,000, you will be taxed on half of it. If you earn more than $44,000, 85 percent of your benefits are taxable.

At what point does one stop paying social security tax?

You are not required to pay Social Security taxes if your earnings exceed the wage base limit, $142,800 in 2021. So, if you earn $142,000 or more, the maximum Social Security tax you will pay is $8,853.60. If you earn less than $142,000, the total Social Security tax you will pay is less than that. In 2022, the wage base limit is $147,000.

What is the social security tax rate for retirees?

In 2021, the combined Social Security and Medicare rate will be 7.65 percent. Up to the wage base limit of $142,800 in 2021, the Social Security portion is 6.2 percent. The tax rate remains the same in 2022, but the wage base limit rises to $147,000.

Conclusion

Social Security is a substantial benefit that benefits millions of retirees, disabled people, and surviving spouses. Each year, the Social Security Administration adjusts benefits to keep up with inflation, resulting in a larger payment for recipients. However, the annual increases may not be enough to keep the program going in the future. If you can save more, it’s not a good idea to rely on Social Security as your sole source of income in retirement. Numerous tax-advantaged savings accounts are available to help you build a nest egg.

If you continue to work after reaching the retirement age, you must contribute to Social Security. Depending on your income, you may be taxed on your Social Security benefits when you begin receiving them. It is possible to be taxed on 50% or 85% of your help. There are numerous strategies for avoiding taxation, including reducing your income as well as your interest and dividend income.