Find out how much taxes will rise next year and who'll have to
pay.
Dan Caplinger (TMFGalagan) Nov
3, 2020 at 10:13AM Author Bio
Social
Security helps tens of millions of Americans by providing retirement income,
and the program isn't limited just to those who have the greatest financial
need. Some of the highest monthly benefit checks go to high-income Americans
who paid the annual maximum amount of Social Security payroll taxes during
their careers.
Most
workers won't pay any more in Social Security payroll tax in 2021 than they did
in 2020, because the actual tax rate hasn't changed for 30 years. But the wage
base on which that tax rate gets applied is rising in 2021, and that means that
regardless of what happens in the presidential election, high-income earners
will pay more to Uncle Sam.
Why most people's Social Security tax stays
the same year after year
Employees
know all too well that Social Security payroll taxes reduce their take-home
pay. The rate is 6.2%. On some paychecks, that gets added in with Medicare
payroll taxes of 1.45% on a line labeled FICA. Therefore, if your earnings are the same
from year to year, then your Social Security payroll tax will be the same as
well.
Many
people don't realize that their employer kicks in an extra 6.2% toward Social
Security taxes. Employees don't have to cover that, but self-employed workers are responsible for
the full 12.4% as part of the self-employment taxes they pay.
There's
currently a limit on the amount of earnings subject to Social Security tax. But
that amount rises nearly every year, based on changes in wages paid to U.S.
workers. In 2021, the wage base is rising $5,100, for a new limit of $142,800.
|
Year |
Social Security Wage Base |
Increase From Previous Year |
|
2017 |
$127,200 |
$8,700 |
|
2018 |
$128,400 |
$1,200 |
|
2019 |
$132,900 |
$4,500 |
|
2020 |
$137,700 |
$4,800 |
|
2021 |
$142,800 |
$5,100 |
DATA SOURCE: SOCIAL
SECURITY ADMINISTRATION.
Who'll pay more?
Here's
how to see whether you're going to get snagged by the rise in the wage base --
and what impact it'll have on your total Social Security taxes paid:
·
If you make less than
$137,700 in both 2020 and 2021, then you'll pay the same in Social Security tax
if your wages stay the same. Any change in tax will be due solely to changes in
your earnings.
·
If you make more than
$142,800 in both 2020 and 2021, then your Social Security payroll tax will
rise. An extra $5,100 will be subject to the 6.2% tax, resulting in an extra
$316.20 in taxes. That'll raise your total taxes paid to $8,853.60.
·
If you make between
$137,700 and $142,800 in 2020 and 2021, then your tax increase will be
somewhere between $0 and $316.20. Exactly how much will depend on where in that
range you fall. For example, if your earnings turn out to be $140,000 in both
2020 and 2021, you would be over the wage base limit for 2020 and therefore pay
tax only on your first $137,700 in earnings. However, with the higher wage base
limit in 2021, the full $140,000 would be subject to Social Security tax. You'd
pay an extra $142.60 as a result.
For
those who are self-employed, the impact could be twice as high. Those making
maximum earnings both years will see a $632.40 hike in the Social Security
portion of their self-employment taxes.
How many people have to pay?
The
$142,800 wage base limit doesn't affect a huge percentage of the American
public. The latest estimates show that only around 4% to 6% of workers have
earnings exceeding the wage base. But that still leaves between 10 million and
11 million employees as potentially subject to tax increases.
About
719,000 self-employed workers earned at least the maximum earnings subject to
Social Security payroll tax in the most recent year for which data's available.
Those folks could see their total Social Security self-employment taxes rise to
more than $17,700.
The Social Security wage base has been on the rise for a
long time, and Americans can expect it to keep going up in the years to come.
That means 2021's Social Security tax increases are just a taste of what
high-income taxpayers can expect in the future.
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