The Social Security Administration (SSA) establishes the maximum income subject to Social Security tax. Specifically, Social Security’s Old Age, Survivors, and Disability Insurance (OASDI) program limits the number of earnings subject to taxation. Conventionally, this is referred to as the contributions and benefit base.
In 2023, the contributions and benefit base are increasing to $160,200 in the U.S. thanks to the high inflation rate.
Furthermore, this is the highest income that may be used to determine the Social Security payments to pensioners when they begin receiving benefits.
In this post, we will explain how this figure is used to compute the Social Security tax that higher-earning Americans must pay and the 2023 Social Security tax limit you would be required to pay.
What Is the Social Security Tax Limit?
The Social Security tax limit is the highest wage level due for Social Security tax. The maximum 2023 Social Security tax limit is $160,200. Essentially, any individual who makes up to $160,200 must pay a 6.2% Social Security tax from their earnings.
How Does the Social Security Tax Work?
The Social Security Administration (SSA) estimates that in 2022, 66 million persons earned an average of $1,681 monthly in Social Security benefits. Benefit claimants will receive a little higher sum of $1,827 due to the cost-of-living adjustment (COLA).
The Social Security tax, also known as the Old Age, Survivors, and Disability Insurance (OASDI), funds these benefits.
The tax consists of two parts:
- The payroll tax imposed by the Federal Insurance Contributions Act (FICA) and the self-employment tax imposed by the Self-Employment Contributions Act and the self-employment tax (SECA), respectively, make up the first part.
- The second part is the Medicare tax, sometimes known as the hospital insurance tax.
Employees’ gross earnings, salaries, and tips are used to calculate payroll taxes. Usually, an employer will withhold these taxes from the employee’s pay and send them to the appropriate authorities.
The Social Security tax rate for employers and employees in 2023 is 6.2% each. Employer and employee contributions to Medicare have a combined tax rate of 2.9% for 2022 and 2023.
Cost-of-Living Adjustment (COLA)
The COLA is the adjustment done to the Social Security benefit amount annually. It is determined by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) under the Department of Labor. Congress established annual COLA adjustments in 1975 when inflation rates were insanely high.
The COLA for 2023 is 8.7%. That means beneficiaries of Social Security will get higher monthly benefits. This rise marks a significant difference from previous years.
Due to the COLA increase, single people will get an average of $1,827 in SSA payments, while couples will receive an average of $2,972 in 2023.
Retirement Earnings Test Exempt Amounts
Workers who receive Social Security benefits before attaining their full retirement age (FRA) must undergo the retirement earnings test.
If you apply for retirement and continue to work, and Social Security determines that your earnings exceed a particular level, it will withhold benefits until you attain FRA. These levels usually increase yearly in line with the national wage index, just as the Social Security tax limit.
Two yearly income amounts are exempt from the retirement earnings test. The first is for those who have not yet reached retirement age, while the second is for people who attain FRA during that year.
Social Security withholds $1 for every $2 exceeding their exempt amount for younger beneficiaries. This means if you are under full retirement age, SSA will deduct $1 from your benefits payment for every $2 you earn above the annual limit.When a person reaches retirement age, $1 will be deducted for every $3 over their exemption limit.
The sums exempt from the earnings test will increase in 2023 to:
- $21,240 for those who have not attained the FRA
- $56,520 for those who attain their FRA
Simply put, a person may qualify for maximum Social Security benefits if their income in 2023 is $21,240 ($56,520) or less. That is an increase from $19,560 ($51,960) in 2022.
When Do You Stop Paying into Social Security?
The average worker contributes 6.2% of their annual income to the Social Security system, and employers match this contribution.
High earners only contribute to the Social Security system until their earnings exceed the $160,200 Social Security taxable threshold in 2023.
Social Security does not tax earnings above $160,200 or use them to calculate future benefits. Once you surpass the maximum taxable income, payroll deductions from your employer will halt, resulting in a bigger paycheck.
Your employer’s payroll department keeps track of this limit and will stop deducting money from Social Security.
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What Is the Maximum 2023 Social Security Tax Limit?
All earned income is subject to Social Security tax at a rate of 6.2% up to the annual cap mentioned earlier. Any income earned from salaries, bonuses, wages, or self-employment qualifies for taxation.
The maximum 2023 Social Security tax limit will be $9,932.40 if you take home more than 160,200 this year.
Comparatively, the contributions and benefit base stood at $147,000 in 2022, which equals $9,114 in maximum Social Security tax. Therefore, the Social Security tax might rise by up to $818.40 for high-income earners next year.
What About Self-Employed People?
Employees must understand that they only contribute 50% of the Social Security tax. That means the 6.2% tax rate applies to employees and their employers.
Self-employed people, on the other hand, play both roles. Sadly, this implies that if you are self-employed, you must pay the full 12.4% tax rate on your earnings, including both sides of the tax.
It is also your responsibility to pay the employer, and employee shares of the Medicare tax levied on all income.
The key issue is that the self-employed earners might end up paying as much as $19,864.80 in Social Security taxes in 2023 instead of the $9,932.40 limit for 2023.
What Happens When Your Earnings Exceed the Taxable Maximum?
Social Security taxes will no longer be deducted when your earnings grow beyond the taxable maximum for a particular job for a year. You will then notice an increase in your paychecks.
Suppose you work several jobs and make more than the maximum taxable amount. Your employers must withhold Social Security taxes from your salary until you attain the maximum taxable sum for that specific job.
However, if more Social Security taxes than the maximum limit for that year were withheld, you can seek a refund when filing your tax return.
Can Your Social Security Tax Increase in the Future?
It is no secret that Social Security is not doing well financially. According to the most recent projections, Social Security’s trust funds will be fully depleted by 2035.
Eliminating the whole contributions and benefit base is one way to enhance program revenue, thus subjecting all earnings to the 6.2% tax rate.
Others propose increasing it significantly to roughly $250,000. The recent proposal is to maintain the wage cap while imposing a Social Security tax on income above $400,000.
While it is impossible to tell which of these ideas—if any—will gain significant political support, high-income earners should monitor these developments.
If they become law, the maximum Social Security tax might increase significantly or disappear altogether.
Who Is Exempt from Paying Social Security Tax?
Some people are eligible for exemptions from the Social Security tax obligation. Some religious organizations opposing Social Security benefits may request a religious exemption.
Non-resident aliens could be exempt depending on the type of visa they have. Students who work on campus may be exempt.
Last, foreign government employees may be exempt under certain conditions. Consult with your tax expert if you think you could belong to one of these categories.
Social Security is a massive benefit helping millions of seniors, people with disabilities, and surviving spouses. Each year, the SSA adjusts benefits to match inflation, frequently resulting in higher payments for beneficiaries.
But based on the 2023 Social Security tax limit, the program may not be able to continue in future years despite the yearly increases. It’s not a good idea to rely solely on Social Security to support you in retirement if you can afford to save more.
There are several tax-advantaged savings accounts available to create a bigger nest egg. Legal Giant partners with skilled tax experts and disability attorneys who can help you understand your options.
Contact us at 833-641-1650 for a free consultation today.