Social Security is funded by payroll taxes, and all workers are subject to them up to a certain limit. That limit can change from year to year to reflect overall wage growth, and in 2020, higher earners can expect to have more Social Security taxes taken from their paychecks.
How Social Security taxes work
The current Social Security tax rate equals 12.4% of your earnings, up to the annual cap. If you're a salaried worker, you pay half that amount (6.2%) yourself, and your employer pays the other half. If you're self-employed, you pay the entire 12.4% tax on your own.
For the current year, the wage base for Social Security purposes is $132,900, which means earnings above that threshold aren't subject to the 12.4% Social Security tax. But the wage base is climbing to $137,700 in 2020, which means higher earners will lose more money in the coming year.
All told, workers earning at least $137,700 will need to pay $17,074.80 in Social Security taxes. If you're salaried, you'll be responsible for $8,537.40, and if you're self-employed, the entire $17,074.80 is on you.
When we compare these numbers to what high earners are forking over in 2019, it means you're looking at an extra $595.20 in Social Security tax in 2020 if you're self-employed. If not, you'll only pay an extra $297.60.
Keep in mind that the wage cap applies to Social Security taxes only; Medicare taxes apply to all of your earnings. The Medicare tax rate is 2.9%, and self-employed workers pay that entire sum themselves. Salaried employees pay half, as is the case with Social Security.
Are Social Security taxes fair?
The fact that very high earners don't pay Social Security taxes on all of their income is a point of contention among workforce members and politicians alike. After all, workers earning less than $137,700 will pay Social Security taxes on all of their income, while those earning $1 million will be spared those taxes on the bulk of their income.
But it's important to realize that Social Security also has a maximum monthly benefit that seniors are allowed to collect. Therefore, while a person earning $1 million will pay the same amount of Social Security tax next year as someone earning $137,700, those two individuals will have the same wage amount for the year factored into their benefits calculation. In other words, the ultrarich can't get more from Social Security in retirement than moderately high earners whose wages hit the annual tax cap, so to make them pay more into the system isn't necessarily the fairest solution.
Get ready to pay more taxes
If you're a higher earner, prepare yourself to fork over some extra money in Social Security taxes next year. And if that's problematic, try lowering your tax burden in other ways. Contributing to a tax-advantaged retirement plan, like a traditional IRA or 401(k), can lower your taxes, as can selling investments at a loss. It's never fun to have to pay more taxes, but that's the reality, so the best you can do is devise a strategy to compensate.