Each year, the Social Security Administration determines the maximum amount of earned income that Social Security tax applies to. This is formally known as the contribution and benefit base.
For 2023, the contribution and benefit base is rising to $160,200, due to the high rate of inflation in the United States. This is also the maximum income that can be used to compute the Social Security payments to retirees who start collecting their benefit.
Here, we'll discuss how this number is used when computing the Social Security tax of higher-earning Americans, and what the maximum Social Security tax you might have to pay in 2023 will be.
What it means for high earners' tax bills
Social Security tax is charged at a 6.2% rate and applies to all earned income, up to the annual maximum mentioned in the previous section. This means that any income you have from salaries, wages, tips, bonuses, or self-employment qualifies (more on self-employed individuals in the next section).
If your earned income is $160,200 or greater in 2023, the maximum Social Security tax is $9,932.40. For comparison, the contribution and benefit base in 2022 was $147,000, which translates to a maximum Social Security tax of $9,114. So, high earners could see their Social Security tax increase by as much as $818.40 next year.
Self-employed people could see a much larger increase
One thing employees often aren't aware of is that they only pay half of the Social Security tax. In other words, the tax rate is 6.2% for both employees and their employers.
Self-employed individuals are considered to play both roles. Unfortunately, this means that if you're self-employed, you have to pay both sides of the tax on your earned income, up to the annual maximum -- a 12.4% tax rate. You're also responsible for paying the employee and employer portions of the Medicare tax, which is applied to all earned income.
The point is that for high earners, instead of a $9,932.40 maximum Social Security tax for 2023, self-employed high earners could have to pay as much as $19,864.80.
Could your Social Security tax get even larger in the future?
It's not a big secret that Social Security isn't in the best financial shape. In fact, the latest estimates call for Social Security to completely run out of money in its trust funds by 2035.
One solution that has been suggested to increase the program's revenue is to eliminate the contribution and benefit base altogether, thereby making all earned income subject to the 6.2% tax rate. Other proposals want to raise it significantly, to about $250,000. And the latest suggestion from politicians is to keep the wage cap in place, but to also impose Social Security tax on income greater than $400,000.
While there's no way to know which of these proposals (if any) will get serious political traction, high earners should keep an eye on these developments. The maximum Social Security tax could get much higher -- or even go away altogether -- if they are signed into law.