If you work and earn income, you may be resigned to the idea of having to pay taxes on every dollar you bring home. But in the context of Social Security, that may not be true.
Workers are required to pay into Social Security via payroll taxes. If you're paid twice a month and recently got your first pay stub, you may have noticed a line item for FICA, which covers Social Security.
But if you're a higher earner, you're not necessarily doomed to have taxes for Social Security taken out of every single paycheck you get this year. That's because there's a wage cap that limits the extent to which earnings are taxed for that purpose.
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This year, earnings of up to $168,600 are subject to Social Security taxes. But income beyond that point isn't.
So let's say you make $350,000 a year. If you're paid evenly throughout the year, you may be finished paying into Social Security before the midpoint of 2024.
In fact, if you're an ultra-high earner, it may be that you've actually satisfied your Social Security tax requirement for the year already. But some lawmakers might argue that that's not a good thing at all.
The problem with the wage cap
Social Security is facing a serious financial shortfall that has the potential to result in benefit cuts down the line. And one solution lawmakers have proposed is to raise the wage cap for Social Security taxes, or even eliminate it entirely.
Taxing income beyond a certain threshold is apt to pump more money into the program. And in the eyes of some, it might also make for a more equitable system.
After all, why should someone who's earning $168,600 a year and someone earning $2 million a year pay the same amount of Social Security tax in 2024? That just doesn't seem fair.
But in reality, here's why one can argue that it is fair: Social Security pays a maximum monthly benefit to eligible recipients. That benefit is based on lifetime earnings. While wages beyond the annual cap aren't taxed for Social Security, they're also not counted for the purpose of calculating benefits.
To put it another way, someone earning $170,000 this year will not pay Social Security taxes on their last $1,400 of income. But that $1,400 also won't be included in the formula used to calculate that person's retirement benefit. So all told, things should even out in theory.
Of course, it can be argued that ultra-high earners don't get hurt financially by the fact that there's a maximum monthly Social Security benefit, since they're generally not so reliant on that money to make ends meet. Someone with an annual income of $7 million probably has ample opportunity to build retirement savings, to the point where any benefits received from Social Security may be negligible, even if those benefits represent the highest monthly sum the program will pay at the time.
But all told, the current system is such that only a limited amount of earnings is taxed for Social Security purposes each year. So it's conceivable that you may be done paying those taxes well before the tail end of 2024, depending on how much you make.
Use your situation to your advantage
It's often the case that higher earners bear higher costs in the course of making the money they do. You may be earning a $200,000 salary right now. But chances are, you live in an expensive city to have access to your job. So when you factor in your specific living costs, your situation may actually be somewhat comparable to that of someone earning $100,000 in an area of the country that's far less costly.
If you're someone who's a moderately high earner -- meaning you earn enough to not be taxed for Social Security on your entire salary but aren't close to earning millions -- you may want to pay attention to when Social Security taxes stop coming out of your paycheck. Once you're no longer having that money withheld, you can take advantage by upping your 401(k) or IRA contributions.
In time, lawmakers might change the rules with regard to Social Security's wage cap. For now, pay attention to how the wage cap impacts you.
