Millions of people receive benefits from Social Security, but the money to fund that program has to come from somewhere -- namely, payroll taxes. Currently, salaried employees have 6.2% of their earnings withheld for Social Security tax purposes. Employers, meanwhile, contribute another 6.2%. For self-employed individuals, the entire 12.4% burden falls on them, though part of that sum is deductible on their taxes.
Either way, paying into the Social Security system isn't fun, even though workers who fork over those taxes stand to benefit from the program down the line. But higher earners, in particular, are apt to be quite unhappy next year because the income limit for Social Security taxes is going up.
How much of your income is subject to Social Security taxes?
Currently, workers are required to pay Social Security taxes on their first $128,400 of earnings. Next year, however, the wage base for Social Security is increasing to $132,900, which means higher earners will be on the hook for taxes on an additional $4,500 of income. For those responsible for just the employee portion of Social Security taxes, that means losing an additional $279. Self-employed individuals, meanwhile, will have to part with an additional $558 compared to last year.
Keep in mind that while Social Security taxes are capped at a certain income level that changes year after year, Medicare taxes are not. Salaried employees are required to pay a 1.45% Medicare tax on all earnings, while those who are self-employed must pay 2.9% on their entire income. On top of that, individual filers with earned income of over $200,000 are responsible for an additional 0.9% Medicare tax. The same holds true for joint filers with over $250,000 of income.
Though many workers will no doubt grumble at the idea of paying more in Social Security taxes, those who are currently receiving benefits have some good news to look forward to: Beneficiaries are getting a 2.8% cost-of-living adjustment (COLA), which will put roughly $480 extra into the average recipient's pocket next year.
A skewed system?
Critics of the current system are quick to call out that Social Security taxes continue to favor the rich. While lower earners inevitably wind up paying taxes on all of their income, higher earners get a break once their income exceeds a certain threshold. Or to put it another way, someone earning $132,900 next year will pay the same amount in Social Security taxes as someone earning $1 million. The flip side, however, is that there's a maximum benefit that seniors are eligible to receive each year, so charging higher earners more in taxes wouldn't be equitable when they're limited to that existing cap.
While nobody likes losing money for tax purposes, the fact of the matter is that Social Security taxes are necessary to keep the program afloat. This doesn't mean that higher earners aren't going to moan about that added tax burden, but the silver lining is that that money is at least going to fund a program that serves as a lifeline for millions of seniors in need.
The Motley Fool has a disclosure policy.