Social Security beneficiaries will get a 2.5% cost-of-living adjustment (COLA) in January, raising the average monthly check from $1.927 per month to $1,976. But that's not the only change coming in 2025. Social Security increases several other numbers annually, based on inflation data, and they don't just affect retirees.
Workers may notice some changes next year, too, and for some, it could come in the form of a higher tax bill. But you probably don't need to lose sleep over it.
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The ceiling on Social Security payroll taxes is going up
Not everyone realizes that the government doesn't charge Social Security payroll tax on all income earned from a job each year. In 2024, it only assesses this tax on the first $168,600 you earn. Of course, this high limit means that most people wind up paying Social Security tax on all their earnings during the year.
That's not the case for some high earners, though. Those who earn more than $168,600 don't pay Social Security tax on anything over this amount, though they still pay income tax on it. Income over the annual ceiling also doesn't help you increase your Social Security benefit in retirement.
The Social Security Administration adjusts this ceiling on Social Security payroll tax annually. In 2025, it will climb to $176,100. This means that some wealthy workers could owe taxes on an additional $7,500 in earnings next year -- but that's not the same thing as paying $7,500 more in tax.
How the rule change will affect high earners' taxes
The Social Security payroll tax rate is 12.4%, split evenly between employee and employer. If you worker for an employer and must pay this tax on an additional $7,500 next year, that's an extra $465 ($7,500 x 6.2% in Social Security payroll taxes that you pay).
Self-employed people must shoulder the full 12.4% tax, though they get to claim a deduction on their income tax return for one-half of the self-employment taxes they pay. In this case, the higher ceiling on Social Security payroll taxes for 2025 will cost them $930 more.
Undoubtedly, many in that group will feel as if this is a drop in the bucket. But if you're worried about having enough money to meet all your obligations, be sure to keep this increased tax in mind when planning your 2025 budget.
If your income falls somewhere between the $168,600 that's subject to Social Security payroll tax today and the $176,100 subject to this tax in 2025, subtract the difference between your income and $168,600 and multiply this by either 6.2% or 12.4%, depending on how much of the payroll tax you must pay, to figure out how much more you'll owe next year. For example, if you earn $170,000, that's $1,400 more than the current limit, which would raise your tax bill by about $87 if you're traditionally employed.
It's business as usual if you're under this limit
If you're currently earning less than $168,600, you won't notice much of a change next year. You'll still pay Social Security payroll taxes on all of your funds, and all your income from your job will help increase your future Social Security benefits.
Theoretically, you could still pay more Social Security payroll taxes next year if you get a raise. But you'll notice the extra money you're making in this case is a lot more than the money that will be automatically withheld from your paychecks to cover your increased Social Security tax.
