This article was updated on Jan. 12, 2016.
When tax season rolls around, Americans get an unpleasant reminder of precisely how expensive the Social Security system is to fund, with employment taxes eating up as much as 12.4% of an individual's earnings every year. But the good news, if there is such a thing when talking about taxes, is that things could be worse.
Unlike income taxes, the amount an individual must pay into the Social Security system is capped. For the 2015 tax year, Social Security taxes were assessed against the first $118,500 in a taxpayer's earnings. (For 2016, the cap will remain at that level.) Any earnings above that threshold for the year are free from Social Security taxation.
The maximum taxable income has increased almost every year since the early 1970s. The one notable exception was the period from 2009 through 2011, when the threshold held constant at $106,800 in the immediate wake of the financial crisis.
Working backwards from these figures, we can arrive at the maximum Social Security tax liability for any given year. For 2014, the most that a non-self-employed person had to pay was $7,254. You get this by multiplying $117,000 (the 2014 taxable maximum) by 6.2% (an employee's share of Social Security taxes). For 2015, the figure is $7,347 ($118,500 times 6.2%).
The situation is a bit grimmer for self-employed people. This follows from the fact that self-employed workers must pay both the employee and employer share of the taxes. In the case of Social Security, that amounts to a 12.4% rate. Thus, for self-employed people, the limit for 2015 is exactly double the limit for non-self-employed people: $14,694.
The silver lining, as I pointed out at the beginning, is that things could be worse. Take income taxes as an example. Not only are income taxes not capped, but they eat up a progressively larger share of your earnings as your income increases. For a single taxpayer in 2015, this ranges from 10% of your first $9,225 in taxable income to 39.6% of earnings in excess of $413,200.
Medicare taxes make for an even clearer analogy. Together with Social Security taxes, Medicare taxes round out what we refer to as "employment taxes." From 1966 to 1990, Medicare taxes abided by the same maximum threshold as Social Security taxes. But shortly thereafter, in 1993, the threshold was eliminated. As a result, for 2015, employees and employers were each assessed a 1.45% tax on the former's wages, while self-employed people paid 2.9%.
At the end of the day, there's no getting around the fact that taxes are an unpleasant part of life. The one consolation is that many of the programs funded by your taxes will someday return the favor by helping to fund your retirement and pay for your healthcare.
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