Please ensure Javascript is enabled for purposes of website accessibility

You'll Probably Pay This Tax All Year -- but the Rich Won't

By Dan Caplinger - Jan 19, 2020 at 8:01AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Find out what many think is the most regressive tax on the books.

Paying taxes is never fun, but one thing that makes many taxpayers more comfortable is the idea that the more money you make, the more in taxes you'll pay. The U.S. has a relatively progressive income tax system, with multiple tax brackets that go up as your income rises.

However, when it comes to Social Security payroll taxes, the situation is much different. The federal government takes money out of every employee's paycheck at the same flat percentage rate of 6.2% for Social Security. Moreover, there's a maximum amount above which no additional tax gets charged -- essentially meaning that the rich get to stop paying this tax at some point during the year even as those of more modest means end up paying it all year long. Below, we'll look at how this tax works and why many think it unfairly favors the wealthy.

Paycheck stub with a pen on top of it.

Image source: Getty Images.

What the wage base means for Social Security taxes

The reason why many consider Social Security payroll tax withholding to be regressive is that the tax gets imposed only up to a certain amount in earnings. Known as the wage base, this amount is $137,700 for 2020.

Once your earnings for the year exceed that $137,700 amount, you'll no longer have to pay any additional Social Security payroll taxes. That means that some ultra-high-income taxpayers have already finished paying their Social Security taxes for the year, while others will be done paying in the near future.

If Your Annual Income Is This:

Then You'll Finish Paying Your Social Security Taxes on:

$200,000

August 8

$500,000

April 10

$1 million

February 20

$5 million

January 11

Calculations by author.

Believe it or not, these figures are actually a little bit later in the year than they were in 2019. That's because the wage base tends to move up each year in line with inflation. For instance, the wage base last year was $132,900, and that resulted in $1 million earners finishing up with their Social Security taxes on Feb. 18 -- two days earlier than this year.

Arguments about Social Security payroll taxes

Needless to say, there are some politicians in Washington who aren't happy with the way the Social Security tax system treats the rich. Recently, there have been numerous proposals that would impose more Social Security payroll taxes on income above the current wage base. Most of these proposals would still leave a spot immediately above the $137,700 amount for which the government wouldn't collect any tax for Social Security, instead having payroll taxes start up again at a higher income level. For instance, one proposal would impose new Social Security taxes for wages above $250,000.

Yet there's an argument against lifting the wage base as well. Currently, the maximum amount of income on which Social Security taxes get imposed also defines the maximum amount of earnings that a worker gets credited for in determining lifetime Social Security benefits. That ensures that everyone paying into the system gets a corresponding positive boost to their future benefit as a result of their paid taxes. If you change the rules to force the rich to pay more without getting anything extra in their monthly checks, it would fundamentally change the way the system has worked for decades. Those favoring a wage base increase argue the advantages outweigh any disadvantage of that change to Social Security, but it's a bone of contention among policymakers.

Looking forward to millionaires' freedom from Social Security taxes

Current law is almost certain to continue at least through 2020 if not beyond, and that means few changes to Social Security tax laws are likely to happen. That'll leave top earners with the ability again this year to stop paying Social Security taxes for a long period, but for those making $137,700 or less, that 6.2% Social Security payroll tax will hit their paychecks from January to December.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
345%
 
S&P 500 Returns
119%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/16/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.