Social Security provides critical benefits to millions of seniors and disabled Americans, but the money for the program has to come from somewhere -- namely, your paycheck. The amount of Social Security tax you'll pay will depend on your income, but if you're a high-enough earner, you could pay a maximum of $7,886.40 in 2017 provided you're not self-employed.
Understanding how Social Security taxes work
All workers are required to pay their share of Social Security taxes. That money is then used to pay current beneficiaries and keep the program afloat.
Though the idea of funding someone else's retirement benefits might seem like a drag, think about it this way: When it's your turn to collect benefits, you'll be glad those Social Security taxes exist, because they'll be funding your payments.
Depending on how much money you earn, you may not pay Social Security taxes on your entire income. That's because a cap is set each year on the amount of income subject to Social Security taxes. Last year, that limit was $118,500, but in 2017, it jumped to $127,200. Now if you earn, say, $50,000 a year, that increase won't make a difference, because you'll still be paying Social Security taxes on your entire income no matter what. But if you're a higher earner making, say, $130,000, you'll pay an additional $539.40 in taxes this year because of that increase.
Now if you're a really high earner and aren't self-employed, the most you'll pay this year in Social Security taxes is $7,886.40. That's because of the 12.4% Social Security tax rate applied to your wages, you're only responsible for paying half, while your employer picks up the other half.
If you're self-employed, however, you'll be on the hook for the entire 12.4%. So if, for example, you earn $100,000 a year, you'll be required to pay $12,400 in Social Security taxes on your own. Though you must pay the full amount up front, you can deduct half of your Social Security taxes from your income when you file your return.
A flawed system?
It's hard to overlook the fact that the current income cap on Social Security taxes clearly favors the rich. Under the present system, a worker earning $127,200 a year will pay the exact same amount of Social Security taxes as someone earning $5 million a year. In fact, lawmakers have long been lobbying to raise the income cap to not only make the system more equitable, but generate much-needed revenue to help Social Security stay afloat.
Currently, the program is facing an $11 trillion shortfall, and without a solution, it will likely need to start cutting benefits as early as 2034. At that point, recipients might lose out on over 20% of their scheduled benefits, which will constitute a huge blow for those without additional income sources.
But while lower-income Americans might celebrate a lifting of the Social Security tax cap, wealthier Americans are sure to be up in arms. Furthermore, increasing the income threshold for Social Security taxes could constitute a major burden for self-employed workers who must cover both the employer and employee portion of those taxes every quarter.
Only time will tell how Social Security taxes come to evolve. For now, just be aware of what you'll pay this year and, if you're self-employed, plan accordingly. Otherwise, you could be in for a very unpleasant surprise when tax season rolls around next year.