The Social Security Administration (SSA) gave retirees and other recipients of the program’s payments good news this week. Next year, they’ll get an 8.7 percent cost-of-living increase.
That’s the highest in more than 40 years, and comes on the heels of this year’s bump that, at the time, was the largest retirement benefits bump in decades.
Some higher earners, however, aren’t so happy.
Today’s SSA announcement also noted that the amount of income subject to payroll taxes also is going up in 2023.
This amount, known as the Social Security wage base, is the maximum earnings, by both salaried workers and the self-employed, that are subject to that retirement portion of the Federal Insurance Contributions Act (FICA) tax.
In 2022, the wage base is $147,000.
On Jan. 1, 2023, it goes up to $160,200.
That means more money from both higher-paid workers and their employers will go next year into the Social Security trust fund, which pays for eventual retiree benefits.
If you make at least as much as the increased 2023 wage base next year for the entire 12 months, you’ll pay $9,932.40 toward the government retirement program.
Sort of an inflation adjustment: Although this sometimes is referred to as an inflation-based increase — and yes, I do include it in the ol’ blog’s annual inflation adjustments series, which should start, depending on word from the Internal Revenue Service, later this month — the annual earnings limit change technically is a cost-of-living, or COLA, amount.
And technically it 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.
There’s debate as to whether 2023’s cost-of-living hike actually will help retirees, given that inflation has hit records this year and, despite Federal Reserve Board efforts, is stubbornly hanging in there.
And yes, Medicare’s monthly premium next year is dropping a bit. But then retirees also have seen the Fed’s interest rate moves rattle the markets, sending the value of their retirement funds’ values down.
“Will the COLA be enough to keep up with inflation? It’s too early to say,” said Mary Johnson, Social Security and Medicare policy analyst at The Senior Citizens League, an advocacy group, told CNN. “It depends on what inflation is going to do from October onwards.”
Still, no Social Security recipient isn’t going to complain about the hike, even though it might mean more taxes on their government benefits.
More government money from some paychecks: High-income workers with retirement still on the horizon, however, will kvetch about the associated higher Social Security wage base.
Those who in 2023 make $160,200 or more will see more of their earnings subject to payroll withholding.
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.
That means most of us working for wages have 6.2 percent taken from our checks each pay period for Social Security and 1.45 percent for Medicare.
Here are the calculations, both for 2022 and 2023, of the practical tax effects of the Social Security wage base on the amount taken out for the federal retirement benefits.
In 2022 if you make up to or more than the $147,000 wage base amount, your potential annual tax out-of-pocket, or more precisely out of paycheck, amount will be is $9,114.00. That’s $147,000 X 6.2 percent.
In 2023 if you earn the maximum wage base of $160,200 or more, you will pay a maximum Social Security tax of $9,932.40. Again, that tax figure comes from your 6.2 percent portion of next year’s $160,200 wage base.
So the $13,200 wage base increase next year results in $818.40 more in taxes coming from your paychecks and into Uncle Sam’s Social Security account next year.
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 2022 tax year for you and your boss:
| Worker maximum Social Security FICA earnings | = | $147,000 |
| Maximum amount of payroll tax withheld from worker (6.2% of $147,000) | = | $9,114.00 |
| Maximum amount matched by employer (6.2% of $147,000) | = | $9,114.00 |
| Maximum possible Social Security FICA tax in 2022 ($9,114.00 employee + $9,114.00 employer) | = | $18,228.00 |
For the upcoming 2023 tax year, the total worker/boss Social Security payroll tax maximum amounts are:
| Worker maximum Social Security FICA earnings | = | $160,200 |
| Maximum amount of payroll tax withheld from worker (6.2% of $160,200) | = | $9,932.40 |
| Maximum amount matched by employer (6.2% of $160,2000) | = | $9,932.40 |
| Maximum possible Social Security FICA tax in 2023 ($9,932.40 employee + $9,932.40 employer) | = | $19,864.80 |
As far as your annual income’s bottom line, the SSA bump of the wage base means you and your employer could pay up to a combined $1,636.80 (the previously mentioned $818.40 out of your paychecks, which also is paid by your employer) more in Social Security taxes if you’re paid up to the maximum wage base amount next year.
Tax ends for those making more: That maximum increased Social Security tax amount, however, is where this FICA component stops.
Earnings in excess of the annual wage base aren’t subject to the Social Security payroll tax. Yep, earnings in excess of $160,201 next year don’t have any FICA tax taken from them.
For now.
Every year when the trustees of the Social Security trust fund issue their annual report on the program’s solvency, talk about increasing or even eliminating the wage base ramps up.
The latest effort was a bill reintroduced in the House by Rep. John Larson, D-Conn., chairman of the Ways and Means subcommittee on Social Security, and in the Senate by Sen. Richard Blumenthal. Both lawmakers are Democrats representing Connecticut.
Their bills, H.R. 5723, and S. 3071, call for, in part, increasing the earnings amount on which FICA Social Security taxes are collected. The pair would apply the payroll tax to wages of more than $400,000.
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 2022 and 2023. Here’s why.
Like the Social Security tax, the 1.45 percent payroll tax that goes toward the federal medical insurance program for eligible folks age 65 and older also is paid by both workers and employers.
But unlike the Social Security portion, the Medicare tax isn’t limited by a wage base. The law says there is no limit on wages that are subject to this combined 2.9 percent payroll tax for Medicare.
So no matter how much more you make than $147,000 this year or $160,200 in 2023, the Medicare 1.45 payroll tax will keep coming out of all your pay and be 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, yes, the ACA add-on tax is still in effect, despite desires of anti-Obamacare lawmakers (aka 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’s Social Security and Medicare taxes on at least some of our income. And the wealthier among us now pay 0.9 percent more.
Self-employment is covered, too: If all this payroll tax talk has you thinking maybe you’ll quit your wage-slave job and start your own business so can avoid the FICA taxes, think again.
If you scroll up to the top of this post (I know, I’m long winded, even when typing), you’ll see a self-employment mention.
The Social Security and Medicare taxes also must be paid by most earners of self-employment income. This includes full-time entrepreneurs, as well as people who turn to side hustles to supplement their salaries.
Yes, it’s a pain. Welcome to being a boss. Or hiring a tax pro to take care of your new business’ payroll and other tax tasks.
But you’ll be glad you paid the taxes when you eventually get around to collecting your Social Security benefits.
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