The Social Security tax is what funds the benefits we get later in life, as you know. Every worker pays his or her share through payroll either deduction or self-employment taxes. What we pay is calculated as a percentage of our income, but it’s nice to know there is a Social Security tax limit, after which point you pay no more tax on that income. In other words, any income over a certain amount is not taxed for Social Security purposes.
This is also called the Social Security maximum wage base.
The Social Security tax is 6.2% and does not change very often. The employee pays 6.2% and the employer pays the same amount again, for a total of 12.4%. If the worker is self-employed, he or she pays the full amount him or herself.
The Social Security Tax Limit
Once income goes over $117,000 no Social Security tax is collected. Unlike the tax rate, the tax limit may change every year to keep up with inflation. For example…
- the Social Security tax limit for 2013 was $113,700
- in 2012 it was $110,100
When the Social Security tax limit goes up, it usually means millions of workers will end up paying more FICA tax. (Remember, FICA tax is Social Security tax plus Medicare tax. There is no limit on the Medicare tax so all wages are subject to this tax.) The inflation-based jump from 2012 to 2013 resulted in 10 million workers having to pay more Social Security tax.
Employers who have employees who are affected by such a raise in the tax limit are to notify them in writing of the increase.
Cost of Living Adjustments
The limit has its mirror image…on the other end of the spectrum, with retirees who are withdrawing form the system and receiving their benefits, there is also an increase. There are cost of living adjustments on Social Security benefits. So, while the tax limit was increased, so was the benefit…by 1.7% for 2013.
COLA is not always the same from year to year. For example, the Cost-of-Living adjustment for 2014 will be 1.5%. 57 million beneficiaries will be affected by the COLA increase*. 8 million SSI beneficiaries will be affected. (SSI is Supplemental Security Income).
Maximum Social Security Benefits
The Social Security Tax limit also has another offsetting factor: there’s a maximum benefit as well. For example, the maximum benefit for 2013 was $2,533 per month. So, as you see, the wealthy among us who make more than the Social Security tax limit don’t have to pay tax on their income over the limit, but they also don’t receive benefits on that extra income, either.
Only retirees who waited until full retirement age (66) are eligible to receive the maximum amount, and only then if their lifetime earnings also qualify.
*Source: Social Security Administration website: Cost of Living Adjustmjent (COLA) Information for 2014.