Ever Notice Your Pay Go Up Midyear?
For those of you who pay attention to how much gets deposited into your checking account from your paychecks, you may have noticed that your pay randomly goes up a bit at some point during the year.
You may not know why, but you're also not going to argue, because, hey, more money!
But, Keith, I'm like super into knowing about finances, so tell me more!
Sure, no worries.
There's a good chance it's due to Social Security.
Social Security?
Social Security.
Okay… care to elaborate?
As you may know, Social Security payroll taxes are taken out of your paycheck. If you look at one of your paychecks, you'll likely see a line item on there about it.
If you're receiving wages, you have to pay 6.2% of your salary into the Social Security Trust Fund (and your employer pays an additional 6.2% of your salary).
It doesn't feel good to pay it now, but you'll likely be very thankful you did in the future when you receive Social Security benefits.
What does that have to do with my paycheck going up?
Nothing.
Just kidding. A lot.
That 6.2% you're paying applies only to the first $142,800 of wages each individual makes in 2021.
If you make more than $142,800 in 2021, as soon as you go over that amount, your employer will stop withholding that 6.2% from your paycheck, which boosts your take-home pay by the same amount!
That could happen in January (if you make A LOT of money), December (if you make barely more than $142,800), or anytime in between (depending on when you cross that threshold).
That means the highest amount of Social Security taxes you'll pay in 2021 is $8,853.60. You math nerds out there may instantly recognize that as being $142,800 multiplied by 6.2%.
Does that amount go up each year?
Yes, the Social Security wage limit is indexed to the “national average wage index.” For 2022, the limit has been announced as $147,000.
That means in 2022, you'll pay that 6.2% tax on the first $147,000 of wages you receive, then nothing thereafter.
The math nerds are at it again, instantly calculating that $9,114 is the highest Social Security tax someone will pay in 2022.
I wish more payroll taxes acted that way!
You might be in luck.
There are also some state-level payroll taxes that act similarly.
For example, if you're living the good life in California, you get the pleasure of paying a 1.20% payroll tax into the State Disability Insurance program.
But that applies only to the first $128,298 of each individual's wages. The show-offs, I mean math nerds, among you will know that means the most CA SDI tax that will be owed is $1,539.58 (rounded up, as the actual calculation is obviously $1,539.576).
Will these taxes go up at some point?
Maybe.
You may have heard some neck-wringing about the Social Security Trust Fund going belly-up (necks and bellies in the same sentence?) and running out of money at some point in the future.
That’s highly unlikely to happen, as it can be fixed by just reducing the level of benefits at some point.
Another way to fix the problem would be to increase the payroll tax. That could happen by increasing that 6.2% number we all know and love by now.
It could also happen by increasing the wage limit, so that the 6.2% tax applies to wages much higher than the current $142,800. Heck, they could even make it so that there's no limit to how much can be taxed (though I see that as unlikely). Or there could be some sort of graduated scale, where 6.2% is paid on the first $142,800, then 5.2% on the next $50,000, then 4.2% on the next $50,000, etc. Or any other variation of these ideas.
It may not be that simple, but I highly doubt the Social Security Trust Fund will “run out” of money and not be able to pay anything in the future.
So, yes, Social Security taxes could go up at some point. But nothing's on the horizon that I know about.
In summary
Good news: Now you're equipped to wow your friends with your sweet Social Security tax knowledge. You'll probably get even more friends if you share your know-how widely at a party!