Employees, self-employed individuals, and employers all contribute to Social Security tax, which can increase annually. However, many people don’t fully grasp the details of the Social Security tax they pay.
Employees
As an employee, your wages are subject to a 12.4% Social Security tax up to an annual limit. For 2024, this limit is $168,600, resulting in a maximum tax of $20,906 (12.4% x $168,600). Half of this tax (6.2%) is deducted from your paycheck, while your employer pays the other half. This tax can be significant, and you might not fully realize its impact unless you closely review your pay statements.
Self-Employed
Self-employed individuals, such as sole proprietors, partners, and LLC members, are acutely aware of the impact of the Social Security tax. They are responsible for paying the full Social Security tax themselves, based on their net self-employment income. For 2024, the Social Security tax ceiling for net self-employment income is $168,600, the same as the wage ceiling for employees. If your net self-employment income for 2024 is $168,600 or more, you will pay the maximum Social Security tax of $20,906.
What to Expect in the Future
The Social Security tax on your 2024 income is already substantial, but it could increase significantly in future years according to projections from the Social Security Administration (SSA). This is because the Social Security tax ceiling will continue to rise based on the inflation factor used to determine these increases, resulting in higher maximum tax bills for high earners. Although the projections are not always precise and the actual ceiling could be higher or lower, if they hold true, the maximum Social Security tax on wages and net self-employment income in 2033 will be $30,095 (12.4% of $242,700). Here’s what we should expect in the future years.
2025 - $174,900
2026 - $181,800
2027 - $188,100
2028 - $195,900
2029 - $204,000
2030 - $213,600
2031 - $222,900
2032 - $232,500
2033 - $242,700
Despite your contributions, you might receive more in Social Security benefits than you pay into the system. For instance, an average-wage earner retiring at 65 in 2020 could pay $466,000 in Social Security and Medicare taxes but receive about $640,000 in benefits. Individual situations vary, and these figures exclude potential interest on those tax dollars. Contrary to popular belief, there are no individual accounts for Social Security benefits—just a government promise.
The Social Security system is on shaky ground. A report states that full benefits will be payable until 2037, after which taxes will cover only 76% of scheduled benefits. Congress will need to make changes, such as raising the full retirement age, increasing tax rates, or revising tax laws to ensure the program's future.
The Social Security tax for many individuals will keep increasing. If you run a small business, there may be strategies to potentially reduce your Social Security tax burden. As an employee, it’s important to include Social Security in your financial planning.
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