Earn a High Salary? Here's Why You Should Expect Your Taxes to Go Up in 2024

Paying taxes is a part of life in the U.S. This holds true whether you work or are fully retired. But when you work, you face different taxes on your income.

Federal income tax is one type of tax you'll face on your earnings. Federal taxes are imposed on a marginal basis, so you pay more tax on your highest dollars of earnings than your lowest. You can refer to next year's tax brackets to see what tax rate might apply to you, based on your income.

What's more, many states impose income taxes of their own, though not all. And the amount of state tax you're liable for might also hinge on your earnings. 

Then there's Social Security and Medicare taxes. You might notice a line item on your pay stub for FICA taxes, which stands for the Federal Insurance Contributions Act. The tax rate you'll pay there is 6.2% of your wages for Social Security, and 1.45% for Medicare, assuming you have an employer. If not, and you're self-employed, these rates double, leaving you on the hook for a total of 15.3% in FICA taxes. 

Now, for most of these taxes, you're looking at paying based on your total income. But there's an exception for Social Security (not Medicare). 

Each year, there's a wage cap put in place that limits the amount of income that's taxable for Social Security. But that cap is rising in 2024. So if you're a higher earner, you might lose an even bigger chunk of your paycheck to taxes.

Workers with high wages should prepare to pay more

In 2023, earnings are exempt from Social Security taxes once they exceed $160,200. But next year, that limit is rising to $168,600. So all told, higher earners will face Social Security taxes on an additional $8,400 of income.

Let's assume you work for an employer and therefore only have to pay 6.2% toward Social Security. If you earn $168,600 or more in 2024, it means you're looking at an additional $521 in Social Security tax. If you're self-employed, you should double that for a total of $1,042.

How to reduce your tax bill

Even if you earn a decent wage, it can be a big blow to lose more of your income to taxes. Let's also remember that while a salary of $168,600 might seem quite high, in certain parts of the country where housing costs are exorbitant, that salary means you might barely be getting by, especially if you have a family to support. The good news, though, is that there are steps you can take to reduce your taxable income. 

First, aim to max out your traditional IRA or 401(k) for the year. If you earn enough for this increase in Social Security's wage cap to impact you, it means you may be in a position to contribute the maximum amount to either account. In 2024, that's $7,000 for an IRA ($8,000 if you're 50 or older) or $23,000 for a 401(k) plan ($30,500 if you're 50 or older).

Next, be mindful of business-related deductions you may be eligible for. If you're self-employed, you can deduct expenses that allow you to earn money, whether it's equipment, internet service, or travel. Keep meticulous records so you know which deductions to claim.

Finally, manage your income strategically. This is something you can do if you're self-employed. If you work for an employer, you likely get paid on a preset schedule.

Perhaps you're able to earn $170,000 in 2024. But if you wait until 2025 to invoice clients for your last $10,000 in income, you'll only have $160,000 in reportable income for 2024. 

Of course, that won't work if you're doing work for clients in August -- you don't want to wait five months to get paid. But you may be able to defer December invoices to January.

Nobody wants to see their taxes increase. It's important to stay aware of the changes so you can do your part to offset increases as they happen.