Social Security Tax Update: How High Can It Go?

Employees, self-employed individuals and employers all pay the Social Security tax, and the bite the Social Security tax takes gets bigger every year. Here's what you should know—and why you should be concerned.

Social Security Tax on Employee Wages

As an employee, your wages are hit with the 12.4% Social Security tax up to the annual wage ceiling. Half the Social Security tax bill (6.2%) is withheld from your paychecks. The other half (6.2%) is paid by your employer, so you never actually see the second half. Unless you understand how the Social Security tax works and closely examine your pay statements, you may be unaware of how much the tax costs.

For 2024, the Social Security tax wage ceiling is $168,600 (up from $160,200 for 2023, an increase of 5.2%). If your wages meet or exceed the 2024 ceiling, the Social Security tax hit for this year will be $20,906 (12.4% times $168,600), half of which comes out of your paychecks. Your employer pays the other half.

The wage ceiling is projected to rise to $174,900 next year. (See "Projected Security Tax Ceilings," below.)

Social Security Tax on Self-Employment Income

Self-employed people, including sole proprietors, partners and limited liability company members, are well aware of the full magnitude of the Social Security tax. That's because they must pay the entire 12.4% Social Security tax hit out of their own pockets, based on their net self-employment income. The fact that companies don't owe any Social Security tax on amounts paid to independent contractors is a big reason why they often prefer to engage independent contractors instead of hiring employees.

For 2024, the Social Security tax self-employment income ceiling is $168,600 (the same as the wage ceiling for employees). So, if your 2024 net self-employment income is $168,600 or more, your income will incur the maximum $20,906 Social Security tax hit (12.4% times $168,600).

Social Security Tax Ceiling Increases vs. Social Security Benefit Increases

Most people don't realize that there's a disconnect between annual increases in the Social Security tax ceiling and annual increases in Social Security benefits. Common sense dictates that they should be linked, but they aren't.

For example, the 2024 Social Security tax ceiling is 5.2% higher than the 2023 ceiling, as noted earlier. But Social Security benefits went up by only 3.2% in 2024 compared to 2023. The reason for the discrepancy is that different inflation measures are used for the two calculations. The annual increase in the Social Security tax ceiling is supposedly based on the increase in average wages while the annual increase in benefits is based on a measure of general inflation.  

Is There a Social Security Benefit Account with Your Name on It?

Some people mistakenly believe that the government has an account with their name on it to hold the money to pay for their future Social Security benefits. After all, that must be where all those Social Security taxes on wages and self-employment income go, right? Unfortunately, there are no individual accounts. All you have is an unsecured promise from the government.

In addition, the Social Security system is currently on shaky financial ground. Politicians have known this fact for years, and efforts to address the issue have gone nowhere. The Social Security Administration now projects that the Social Security trust fund will become insolvent in 2034. Previously this projected insolvency date was 2035, so it's creeping closer. So, additional Social Security tax hikes in the form of higher rates or some tax-law reconfiguration that effectively implements higher ceilings (or both) are probable.

Some politicians have floated a tax-law change that would restart the 12.4% Social Security tax on wages and net self-employment income above $400,000. This is the so-called "donut hole" approach to increasing the Social Security tax. Over the years, the donut hole would gradually close as the lower edge of the hole is adjusted upward for inflation while the $400,000 upper edge of the hole remains fixed.

Projected Social Security Tax Ceilings

The Social Security tax hit on your income is expected to get much worse in future years, according to Social Security Administration (SSA) projections. That's because the Social Security tax ceiling will continue to go up based on the inflation factor that's used to justify the increases. In turn, maximum Social Security tax bills for higher earners will go up every year.

The latest SSA projections for Social Security tax ceilings for 2025 through 2032 are as follows, based on the so-called intermediate case numbers:  

• $174,900 for 2025,
• $181,200 for 2026,
• $188,700 for 2027,
• $196,500 for 2028,
• $204,600 for 2029,
• $212,700 for 2030,
• $221,400 for 2031, and
• $230,100 for 2032.

These estimated ceilings could get worse, because the SSA projections are often below the actual figures. For instance, the 2024 ceiling was projected to be $167,700 in the April 2023 SSA report, but the actual number turned out to be $168,600. But if the projected numbers play out, the maximum Social Security tax hit on wages and net self-employment income in 2032 will be a whopping $28,532 (12.4% times $230,100).

Don't Bank on Social Security Benefits Alone

The Social Security tax hits on many individuals will continue to increase under current law. And when it's time for you to retire, there's no guarantee that you'll receive the benefits you've been promised. So it's important to save your own nest egg to supplement the Social Security benefits you'll receive. Contact your SSB financial advisor to develop a retirement savings strategy that's right for your situation.

©  2024