The Old-Age, Survivors, and Disability Insurance (OASDI) program of Social Security limits the total amount of taxable income that an individual is responsible for paying in any given year. When those earnings are factored into the calculation of benefits, the same annual limit is applied. However, this limit shifts about every year in response to fluctuations in the index that tracks the national average wage. This sum is also sometimes referred to as the taxable limit. The maximum amount of income that is taxable for Social Security was $142,800 in 2021. Meanwhile, earnings in excess of this threshold are not subject to the Social Security tax and are not taken into account when calculating retirement benefits under Social Security. But what’s the social security tax limit in 2023 and why is it sometimes higher than the federal?
Well, let’s find out…
Overview
Social Security, which sometimes goes by the name Old-Age, Survivors, and Disability Insurance, is an insurance program. Basically, it helps replace a portion of a person’s income in the event of retirement, disability, or death. Likewise, it is primarily supported by the Social Security tax, which is levied on all earned income (with the exception of investment income) up to a maximum taxable income limit. The highest allowable amount rises every year in tandem with the index tracking the growth of the national average pay. As of 2021, this amount rises to $142,800. while any income that is in excess of the threshold is exempt from the tax.
Since the introduction of the social security tax in 1937, there has always been a limit on the amount of income that is subject to taxation. It has been raised a large number of times. Basically, either on an ad hoc basis or automatically as a result of a formula the Congress established to raise it. However, according to the federal Office of Retirement and Disability Policy, the general purpose of the maximum taxable income limit is to
- Maintain the relationship between pre-retirement earnings and benefit levels as wages rise;
- Reduce the projected funding shortfall for Social Security; and
- Create a payroll tax structure that is less regressive.
Tax-Related to Social Security
Generally, the Old Age, Survivors, and Disability Insurance tax (OASI tax) and the Disability Insurance tax ( DI tax) are both parts of the Social Security tax. OASI and DI taxes are a must for both employees and their employers to pay. On the other hand, people who are their own employers are responsible for paying both the employee and employer’s share of taxes.
Since 1937, when it was set at $3,000, the social security taxable income limit has increased to $142,800 in 2021. Basically, since the establishment of the present funding formula in 1982, it usually increases each year. The only exceptions to the time periods covered are 2009 to 2011 and 2015 to 2016, when it did not.
Read Also: OASDI TAX: Old Age, Survivors, and Disability Insurance Contribution, Deferral & Payroll (Updated!)
The amount of wages that are liable for Social Security tax in 2022 is subject to an annual limit that the federal government imposes. The taxable limit amount for Social Security purposes will increase to $147,000 in 2022, up from $142,800 in 2021. In the year 2022, the Social Security tax limit subject to a deduction from an employee’s paycheck is going to be $9,114 ($147,000 x 6.2 percent).
In other words, beneficiaries of the Social Security system will get a benefit payment with a marginal increase in 2022. The cost-of-living adjustment (COLA) was raised in October 2021 by 5.9 percent for 2022. This, however, is significantly more than the increase of 1.3 percent applicable for 2021.
Basically, there are two components to the tax. The first is the payroll tax; a Federal Insurance Contributions Act (FICA) requirement and the second is the self-employment tax; one that the Self-Employment Contributions Act (SECA) requires. It is important that both of these taxes are mandatory. The other component is known as the Medicare tax, sometimes known as the “hospital insurance tax.”
The gross wages, salaries, and tips of an employee will be added together and serve as the basis for calculating payroll taxes. Typically, an employer is responsible for deducting and remitting these taxes to the appropriate governmental agency on an employee’s behalf. In the year 2022, the rate or limit of the Social Security tax will remain unchanged at 6.2 percent for both the employer and the employee.
The employee and the employer are each responsible for paying a portion of the Medicare tax, resulting in a total tax rate of 2.9 percent for the tax years 2021 and 2022.
Generally, the government usually determines the annual Social Security tax limits depending on changes in the National Wage Index (NAWI), which has a pattern of increasing every year. The purpose of these modifications is to ensure that recipients’ Social Security benefits continue to keep pace with prevailing levels of inflation.
A Social Security payroll tax of 6.2% will not affect any additional income you earn beyond the wage ceiling amount that applies to you. For instance, a worker who makes $175,000 in 2022 will be responsible for $9,114 worth of Social Security taxes ($147,000 x 6.2 percent).
It is important to keep in mind, however, that the wage base for Medicare tax has no upper limit. The employee only needs to pay Social Security tax on the first $147,000 of their income. Nevertheless, they will be responsible for paying 1.45 percent Medicare tax on the full $175,000 of their income. Meanwhile, workers who earn more than $200,000 in 2022 will be liable to an extra Medicare levy of 0.9% of their earnings.
However, it’s possible that high incomes will see a decrease in their take-home pay. This is a result of the combination of the recent increase in the Social Security tax limit and the high Medicare tax. Unfortunately, this indicates that employees with more than $200,000 in earnings in 2021 will likely be subject to a higher tax liability in 2022.
Read Also: WHAT IS SOCIAL SECURITY? Benefits, Taxes, and Retirement Tips
The Social Security Administration (SSA) made an announcement on October 13 that the maximum earnings that are subject to the Social Security payroll tax will increase to $147,000 on January 1, 2023. This is an increase of $4,200 from the maximum earnings that are subject to the Social Security payroll tax in 2021, which was $142,800. The Social Security Administration (SSA) also published a fact sheet. One that provides a concise overview of the 2023 cost of living adjustments (COLAs).
The Social Security Administration (SSA) performs an annual calculation; to determine the inflation rate as well as the national average wage index. Generally, the taxable wage limit is subject to an automatic adjustment each year. And this is a result of increases in the national average wage index rather than the inflation rate.
| 2022 | 2023 | |
| Income | $143,000 | $143,000 |
| Wage Cap | $142,800 | $147,000 |
| Social Security Taxes | $8,854 | $8,866 |
The FICA Rates
The Federal Insurance Contributions Act (FICA) tax is a combination of Social Security and Medicare payroll taxes. Changing FICA tax rates is only possible if new tax legislation is enacted.
A payroll tax of 12.4 percent is levied on wages up to the taxable earnings ceiling. While employers pay 6.2 percent of Social Security’s 12.4 percent payroll tax on wages up to the taxable earnings threshold; workers pay the other half. On the other hand, workers who are self-employed pay the entire 12.4% tax rate.
In other words, the combined Social Security and Medicare payroll withholding rate for employers and employees is 7.65 percent. While only the Social Security portion is being limited to the taxable maximum amount. The Medicare payroll tax rate is a matching 1.45 percent on all earnings for both employers and employees. However, in the case of self-employed workers, they will have to pay the full 2.9 percent).
| Employer | 7.65% (6.2% + 1.45%) |
| Employee | 7.65%(6.2% + 1.45% |
| Self-employed | 15.3%(12.4% + 2.9%) |
In addition, the above-mentioned payroll tax rates do not take into account an additional 0.9% in Medicare taxes. The 0.9% that highly compensated employees on wages that are in excess of certain threshold levels must pay. However, this may vary according to their filing status:
- $250 000 for married taxpayers who file their taxes together.
- $125,000 is the amount for taxpayers who are married but file separately.
- $200,000 for taxpayers who are single, and $100,000 for all other taxpayers.
However, because there are no adjustments for inflation in these legally mandated salary thresholds, they continue to apply to an increasing number of workers on an annual basis.
The income from Social Security is taxable. It is normally subject to taxation at the federal level. However, whether or not you need to pay taxes on your Social Security benefits is contingent on the amount of income you get. Nevertheless, you should plan on paying income taxes on your Social Security benefits. Especially if you have other sources of income in retirement, such as a 401(k) or part-time job. If you do not have other sources of retirement income, you will not have to pay income taxes.
However, if you live solely off of the money you receive from Social Security, it’s likely that you won’t have to pay taxes on those payments. The taxation of Social Security is governed by a patchwork of state laws. Regardless, it is in your best interest to collaborate with a financial counselor. One who can assist you in understanding how various types of retirement income are subject to taxation.
Basically, you will first need to assess your total income before you can decide whether or not your Social Security is taxable. In general, to determine the total income for the purpose of this discussion; you just need to adjust your gross income, which includes any nontaxable interest, plus fifty percent of your Social Security payments.
However, when determining your total income, your combined income and social security benefits are taken into consideration. This meanwhile is if you are married and filing your taxes jointly with your spouse.
After that, you will need to determine how much of your Social Security income is taxable, if any at all. You can do this by simply comparing your total income to the base amounts that correspond to your filing status. You’ll find that you fit into one of these three groups once you examine yourself. In the event that your total revenue is:
- If your Social Security benefits are less than the base amount, then you do not have to pay taxes on them.
- Your income from Social Security, between the base amount and the maximum amount, may be subject to taxation of up to fifty percent.
- Your Social Security benefits, above a certain threshold amount, may be taxable at a rate of up to 85 percent.
Conclusion
The wage base limit is only applicable to the social security tax. The maximum amount of income that is subject to tax in a given year is equal to the wage base limit. This base will be $147,000 for earnings in the year 2022. It stands as the most up-to-date information on the pay ceiling for social security earnings.
On the other hand, there is no upper limit on the wage base for the Medicare tax. Every dollar of taxable wages is subject to the Medicare tax.
Millions of seniors, people with disability, and surviving spouses benefit from Social Security. In order to keep up with inflation, the Social Security Administration increases benefits each year. This generally results in a larger payment for beneficiaries.
Annual increases may not be enough to keep the whole thing going in the long term. Relying solely on Social Security in retirement is a bad idea, especially if you can save more. It is possible to construct a substantial nest egg with tax-deferred investments.
Social Security Tax Limit FAQs
What's social security background information?
Employers, employees, and people who are self-employed are all subject to two different taxes. The social security tax-as a result of the Federal Insurance Contributions Act (FICA). The first tax is for old age, survivors, and disability insurance, which is more common. The second tax is for hospital insurance (Medicare tax).
What is maximum amount of compensation subject to the Social Security tax?
There is a cap on the amount of compensation that is subject to Social Security tax. But there is no cap on the amount of compensation that is due to the Medicare tax. The FICA tax rate for employers is 7.65 percent in the year 2022. This, according to the Federal Insurance Contributions Acts, includes contributions of 6.2 percent to the Social Security tax and 1.45 percent to Medicare (the same as in 2021).
Is There a Difference Between OASDI and Social Security?
The term “Social Security” refers to the official name of the government OASDI program. OASDI is the abbreviation of Old-Age, Survivors, and Disability Insurance.
How much money will be taken out of my Social Security check for taxes each month?
Depending on your combined income, the amount of taxes taken from your Social Security payment will vary. Meanwhile, the tax rate for employers is 7.65 percent in the year 2022 according to the Federal Insurance Contributions Act, including contributions of 6.2 percent to the Social Security tax and 1.45 percent to Medicare (the same as in 2021).
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