More than 60 million people receive benefits from Social Security, including retirees, disabled workers, and their family members. To come up with the money that pays nearly $1 trillion in benefits each and every year, the Social Security system has to collect revenue, and its biggest source of funding comes from the payroll taxes that the American workforce pays on its earnings.
Every year, Social Security recipients look forward to the annual cost-of-living adjustment (COLA) in their benefits, and this year is no exception. Based on current projections, Social Security checks will likely grow between 2.5% and 3% next year. But on the flip side, some of those who still work and pay taxes into the Social Security system could end up footing a bigger tax bill as well.
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How Social Security payroll taxes work
The way Social Security taxes work is pretty simple. Employees have 6.2% of their earnings withheld from their paychecks in order to cover their Social Security tax obligations. Employers also have to match that 6.2% from their own pockets. If you're self-employed, then you end up shouldering the entire burden of that combined 12.4% tax rate.
But there's a limit on the amount of income on which the Social Security payroll tax is imposed. Every year, the Social Security Administration (SSA) calculates what's known as the Social Security wage base. This figure serves two purposes: to determine the maximum amount of taxes collected from workers for the year, and to place a maximum on the countable earnings for the year in determining Social Security benefits.
For instance, in 2018, the Social Security wage base is $128,400. That means that you'll have to pay Social Security payroll taxes on as much as $128,400, which works out to a maximum of 6.2% of that figure, or $7,960.80. Once you've paid that amount, no more money will be withheld from your check for Social Security taxes, and those who earn above that amount generally see a nice boost to take-home pay once they hit that mark.
Will the wage base go up in 2019?
The wage base generally goes up from year to year in the same way that Social Security benefits do. However, the methodology that the SSA uses to calculate the changes in the wage base is different.
The SSA looks at the national average wage index, which measures how much the typical American worker makes in a given year. Because of lags in the collection of relevant earnings data, the figures that go toward determining the change for a particular year generally come from a couple of years before.
For instance, in 2015, about 160.8 million workers earned a total of roughly $7.42 trillion, which worked out to an average of $46,120 per worker. In 2016, 163.5 million workers earned $7.63 trillion, raising the average to $46,641. That was an increase of 1.13%, which was used to determine the initial wage-base increase for 2018. Using that figure would have resulted in a boost from $127,200 to $128,700.
But 2018 turned out to be a special case because of flaws in the initial data set. Once the SSA corrected the figures, it reduced the size of the increase, setting a final wage-base limit for 2018 of $128,400.
The important thing to note is that the increase in the wage base doesn't necessarily match the COLA for Social Security benefits. That disparity has been even bigger in some years, with a wage-base increase for 2017 totaling more than 7% even though cost-of-living increases for Social Security recipients had totaled up to just 0.3% over the previous two years.
2019 could bring higher taxes
Although the national average wage index isn't out yet, other monthly data on wages suggest that growth was largely in the 4% to 5% range during 2017, which will determine the increase in the wage base for 2019. For most workers, that won't make any difference, because they won't come close to making the $130,000 to $135,000 maximum amount for their tax. For high-income employees, though, an increase could boost their Social Security tax burden by as much as $400 -- and that won't come as welcome news.
