Social Security helps keep millions of seniors afloat each year. But the program doesn't magically fund itself. Rather, it needs revenue to stay afloat.
Social Security's primary source of revenue is the payroll tax it collects. If you've ever glanced at your paycheck, you'll notice that Social Security takes a chunk out of it.
But if you're a higher earner, you may not pay taxes on all of your income. That's because there's a wage cap that dictates how much earnings workers pay Social Security taxes on.
In 2021, the wage cap is $142,800, and earnings beyond that point aren't subject to Social Security taxes. But the wage cap is rising in 2022, which means you may need to part with more of your income.
Prepare for a tax hike
Social Security taxes amount to 12.4% of your earnings up to the annual wage cap. If you're a salaried employee, you're required to pay half that amount yourself while your employer picks up the other half of that tab. If you're self-employed, you're responsible for the entire 12.4%.
Meanwhile, in 2022, the wage cap for Social Security is $147,000. That's an increase of $4,200 compared to this year. It also means that salaried workers will pay an extra $260.40 in Social Security tax next year if their earnings are high enough, while the self-employed will pay an extra $520.80.
All told, if your earnings reach or exceed next year's wage cap, your total Social Security tax bill will amount to $9,114 if you're splitting that tab with your employer. If you're self-employed, you'll lose $18,228. Ouch.
Why don't higher earners pay more Social Security tax?
Social Security is facing a major revenue shortfall in the coming years, and one proposal lawmakers have to address it is raising the wage cap or eliminating it altogether. If that were to happen, higher earners could see their tax liability skyrocket.
But raising the wage cap or getting rid of it isn't as simple as it may seem. Social Security pays benefits based on workers' respective earnings histories, and there's a maximum benefit that seniors can collect. If the wage cap were to be raised, the maximum benefit would need to follow suit. And that could create a scenario where Social Security doesn't come out ahead in terms of extra revenue.
Gear up now
Taxes are a part of life, and that includes the taxes you pay into Social Security. If your earnings are high enough that the updated wage cap affects you, make sure you're ready to face a higher tax bill -- especially if you're self-employed.
At the same time, there are steps you can take to lower your overall tax burden so you're not hurt as badly by a higher Social Security tax liability. Maxing out your IRA or 401(k) plan could shield more of your income from the IRS, and the same goes for funding a health savings account if you're eligible.
Nobody wants to pay taxes, whether it's to fund Social Security or another reason. But the silver lining is that the taxes you pay will help ensure that once you retire, you'll be in line for a monthly benefit that helps you cover your expenses during your senior years.