The Social Security Administration (SSA) just gave retirees and other recipients of the program’s payments some good news with the announcement of a small hike in their benefits year.
Some higher earners, however, aren’t so happy.
In the same benefits raise announcement, the SSA noted that the amount of income subject to the Social Security payroll withholding also is going up in 2021.
This amount, known as the Social Security wage base, is the maximum of earnings, by both salaried workers and the self-employed, that are subject to that portion of the Federal Insurance Contributions Act (FICA) tax.
For the 2020, the wage base is $137,700. On Jan. 1, 2021, it goes up to $142,800.
That means more money from both workers and their employers will go next year into to the Social Security trust fund, which pays for eventual retiree benefits.
If you make at least as much as that increased wage base next year, you’ll pay $8,853.50 in 2021 toward the government retirement program.
Sort of an inflation adjustment: Technically, this cost-of-living, or COLA, amount isn’t indexed for inflation.
Instead, each year the SSA uses a specific formula to set the maximum taxable earnings level when a COLA is effective so that Social Security benefits can keep pace with, you guessed it, inflation.
If you don’t make six figures, then you won’t see any changes to your pay as far as this withholding. But if you’re a high earner, more of your money will be subject to payroll withholding.
Wage base tax ramifications for workers: The total FICA amounts that come out of salaried workers’ paychecks and which is matched by their bosses is 15.3 percent.
The Social Security component is 12.4 percent. The remaining 2.9 percent is for Medicare, the government’s medical insurance benefit. Each of those amounts is paid equally by workers and employers.
So most of us have 6.2 percent taken from your check for Social Security and 1.45 percent for Medicare.
Here are the numbers, both for 2020 and 2021, for the practical tax effects of the Social Security wage base.
First, this year’s calculations. In 2020 if you earn at least the maximum wage base of $137,700 then you will pay a maximum Social Security tax of $8,537.40. That tax figure comes from 6.2 percent X $137,700.
Similarly, in 2021 if you make at least the wage base amount, your possible out-of-pocket, or more precisely out of paycheck, amount is $8,853.60. Again, that’s using the new $142,800 wage base amount X 6.2 percent.
Social Security total from both sides: Those amounts, however, are literally just half the Social Security tax story.
Remember, your employer matches your FICA taxes.
Here’s how that plays out for Social Security withholding for the full 2020 tax year for you and your boss:
| Worker maximum Social Security FICA earnings | = | $137,700 |
| Maximum amount of payroll tax withheld from worker (6.2% of $137,700) | = | $8,537.40 |
| Maximum amount matched by employer (6.2% of $137,700) | = | $8,537.40 |
| Maximum possible Social Security FICA tax in 2020 ($8,537.40 employee + $8,537.40 employer) | = | $17,074.80 |
And for the upcoming 2021 tax year, the total worker/boss Social Security payroll tax maximum amounts are:
| Worker maximum Social Security FICA earnings | = | $142,800 |
| Maximum amount of payroll tax withheld from worker (6.2% of $142,800) | = | $8,853.60 |
| Maximum amount matched by employer (6.2% of $142,800) | = | $8,853.60 |
| Maximum possible Social Security FICA tax in 2020 ($8,853.60 employee + $8,853.60 employer) | = | $17,707.20 |
As far as your annual income’s bottom line, the SSA bump of the wage base means you’ll pay $316.20 more in FICA taxes if you make the maximum wage base amount during 2021.
If, however, you make $137,701 or more this year or $142,801 or more next year, your earnings in excess of the wage base amounts will not be subject to the Social Security payroll tax.
No income tax cap on Medicare: OK, I hear some of y’all who see two government program withholding lines on your pay stubs wondering why I didn’t show my work on the Medicare tax portion for 2020 and 2021.
The 1.45 percent tax, which goes toward the federal medical insurance program for eligible folks age 65 and older, also is paid by both workers and employers.
But the Medicare tax isn’t an issue when it comes to the annual wage base amount because there’s no limit on wages that are subject to this combined 2.9 percent payroll tax.
So no matter how much more than $137,700 you make this year or the excess of $142,800 in 2021, the Medicare 1.45 payroll tax will keep coming out of your pay and being matched by your boss.
ACA add-on: The Medicare tax also turns the tables on higher earners.
Where they are off the hook for any additional Social Security taxes after they make more than the annual wage base, they could be hit by the Medicare surtax.
The Affordable Care Act, aka the ACA or Obamacare, assesses a 0.9 percent additional Medicare tax on employees who, as single taxpayers, earn more than $200,000 or more than $250,000 if married filing jointly.
Those Medicare surtax earnings limits are not adjusted for inflation. They are set by the health care law.
And the add-on tax is still in effect, despite desires by Republicans to end it. It’s also not matched by employers, but is borne only by the well-paid affected workers.
The bottom line is that all of us pay FICA taxes on some of our income.
With the annual wage base adjustments to portion subject to Social Security withholding (or self-employment payments, including tax filings related to side hustles), most of us workers pay FICA taxes on all of our income since we don’t make more than that six-figure amount to escape the Social Security tax portion.
And a few wealthier workers will pay more Medicare taxes on more of their income.
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