Stealth Increase to Social Security Taxes

May 10, 2017

With little fanfare, the Social Security Administration has raised the Social Security wage cap from $118,500 to $127,200. That’s a tax bump of 7.3% for high earners. As a result, the maximum amount of Social Security tax you can pay for the year will increase from $7,347 to $7,886.40. This is the largest one-year increase in the Social Security taxable earnings cap since 1983.

But, 6.2% is only half the story.  That 6.2% tax withheld for Social Security from your wages isn’t the only tax money that goes to the Social Security Administration. Your employer also has to pay 6.2% of your salary out of its own pocket for Social Security. If you’re self-employed, you have to pay both sides yourself, resulting in a 12.4% Social Security tax — and an even more significant tax bump in 2017. The IRS does sweeten the self-employed taxpayer’s deal somewhat by allowing them to deduct half of their self-employment taxes from their taxable income.

Contrary to common belief, the Social Security taxes from your paycheck aren’t set aside for your own benefit. The taxes that the Social Security Administration collects today pay for the benefits of current retirees. Any money that’s left over goes into the Social Security trust funds for future use.

In January 2017, retirees received a 0.3% cost-of-living increase to their Social Security benefits. That works out to around $5 extra per month for the average recipient. The maximum Social Security benefit has also gone up slightly for workers who retire at full retirement age, from $2,639 to $2,687. These increases are part of the reason for the taxable-income bump.

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