Social Security recipients have been closely monitoring the projected cost-of-living adjustment (COLA) for 2023 because it's supposed to be the largest increase in benefits in more than 40 years due to inflation.
But there's another upcoming Social Security change in 2023 that will impact all workers from those in their 20s to those who might be collecting benefits but are still working.
I'm referring to the wage base that specifies how much of a worker's wages are subject to Social Security taxes. In 2023, there is a big change coming to the wage base.
A growing wage base
Each year, the Social Security Administration (SSA) limits the amount of wages that people have to pay Social Security taxes on. In 2022, the wage base is currently $147,000. The Social Security tax rate is 6.2% for both employees and employers, or 12.4% if you are self-employed.
Image source: Getty Images.
That means if you had an annual salary this year of $200,000, you wouldn't pay Social Security taxes on $53,000 of it.
It also means that if you have wages of at least $147,000 this year, you will pay Social Security taxes of $9,114 if you work for an employer and $18,228 if you are self-employed. Here are the wage base limits for the last five years.
- 2018 -- $128,400
- 2019 -- $132,900
- 2020 -- $137,700
- 2021 -- $142,800
- 2022 -- $147,000
If there is a COLA increase, the wage base is calculated based on another wonky formula that seems to be common in the world of Social Security.
The SSA states that the formula starts with the wage base in 1994, which was $60,600. Then you would multiply this number by the national average wage index (NAWI) two years prior to the year you are trying to calculate the new wage base. So, because we want to calculate the wage base for 2023, you would multiply the 1994 wage base by the NAWI for 2021, which was $58,743.07. Then the formula has you divide by the NAWI from 1992, which was $22,935.42.
Showing the math, the 2023 wage base formula is: $60,600 x $58,743.07 = $3,559,830,042. Divide that by $22,935.42 and you get about $155,211.
However, due to another wonky rule from the SSA, if the number calculated is not a multiple of $300, you would round down to the nearest multiple of $300, which happens to be $155,100.
The new wage base of $155,100 is $8,100 higher than the current wage base and the largest increase in many years. You can never see the wage base go down, so this calculation only applies if the following year's number is higher than the current wage base.
What could you pay in Social Security taxes in 2023?
As I mentioned above, if you work for an employer, your Social Security tax rate is 6.2%. If you are self-employed, the tax rate is 12.4%. That means if you make at least $155,100 in annual wages, you are looking at a bill of $9,616.20. Self-employed workers would pay $19,232.40. That's an additional $502.20 or $1,004.40 in Social Security taxes next year.
