Social Security Tax Limit

The social security tax limit determines the maximum amount individuals will pay annually towards social security. The Social Security program provides greatly needed benefits to millions of senior citizens and people who are disabled. The money to support this program comes from every working American’s paycheck.

What is the Maximum Social Security Tax in 2017?

The amount that is taken out of every American’s paycheck depends primarily on the amount of their income. High earners could pay a maximum amount of $7,886.40, unless you are self-employed.

The most income that is subject to the Social Security payroll tax is a maximum of $118,500 in both 2015 and 2016. In 2017, the Social Security administration has announced that it will be increased by 7.3 percent (an increase of $8,700), placing the maximum amount at $127,200.

In 2016, an employee would pay a maximum amount of Social Security tax of $7,347, and a self-employed person would pay $14,694.  For 2017, the increase will respectively be $539.40 and $1,078.80.

Estimates place the number of people who will pay Social Security taxes for 2017 at 173 million. It is expected that about 12 million will end up paying more due to the increased taxable maximum.

The estimate is based on figures that the government anticipates in wage growth for 2017, after considering recent year trends.

Self-employed individuals pay twice as much every year in Social Security taxes. In 2017, the individual employee will pay $15,772.80. This is also the maximum amount that any single person would pay in Social Security tax for the year.

The increase in the amount of taxable earnings for Social Security is the largest one to take place in one year since 1983. It was large because the law prevented the maximum from being changed in 2016 because there was no cost of living increase in the Social Security benefits.

Prior to the start of each year (January 1st), employers in the United States must make adjustments to their systems in payroll in order to ensure that the right amount of the Social Security tax is taken out of their employees’ salaries. Employees must also be notified that there will be an increase in withholding from their paychecks.

For employees whose pay is greater than the $118,500 maximum, their paychecks will receive a decrease in the amount of pay that they take home. Only an annual raise can compensate for this difference.

If raises are given, employers can also expect to pay more. The 6.2 percent Social Security tax will need to be applied to any additional raises, which economists see could mean fewer pay increases.

The Atlanta-based organization, the Foundation for Economic Education, says that the bottom line of where the tax burden lies (employer or employee) really depends on the flexibility of supply and demand.

Any job is only worth what an employer considers it to be worth, and the employer’s responsibility to pay the payroll taxes are just a part of the cost.

It is important that a compensation budget consider that some positions will require an increase in taxes.

Employers should expect that some employees will want employers to pay the entire difference, either through increased salaries or more for the changes in the tax amounts. When making decisions about this, employers need to keep in mind that salary budgets only have so much money in them.

Individuals who are self-employed must pay both portions of Social Security – the employee’s and the employer’s parts. This adds up to 12.4 percent, and must be paid on any salary less than the maximum amount.

Understanding How Social Security Taxes Work

Every person who works is required to pay Social Security taxes. The money is used to pay the benefits of people who are currently beneficiaries, and it keeps the system going. Those people currently paying the taxes need to realize that those taxes will one day be used to pay their benefits.

People who are high-earners may not pay taxes on all of their income. There is a cap set on how much income is taxable by Social Security. This tax is different than the Federal income tax, which is a tax on almost all income, unless it is put into various tax shelters. More taxes are required of those who earn more than most people.

The cap on income for Social Security was $118,500 in 2016, but it was raised to $127,200 in 2017. For people who make less than that, there will not be any difference. If you made, for example, $130,000, there will be a tax increase of $539.40 as a result of the cap being raised.

High-earners that are not self-employed will not pay any more than $7,886.40 for this year. Although the government requires 12.4 percent be applied to your paycheck, your employer will pay half of those taxes. Self-employed people must pay the entire 12.4 percent.

A Flawed System

An obvious problem with the Social Security system is that it definitely favors rich people. They will never pay more than the cap. This results in people who make millions every year never paying more in Social Security than someone who earns $127,200.

Efforts have been attempted for many years to raise the ceiling so that the rich pay their share. If this is accomplished, it would certainly help the Social Security system to keep on working. At the present time, there is a shortfall seen of $11 trillion. Without any changes, it is predicted that benefits will need to start being reduced in 2034. When that happens, it is possible the benefits may need to be reduced by 20 percent. This will certainly affect those who depend on the monthly benefits for income.

Attempting to increase the cap even higher will be met by opposition from wealthy Americans. Raising the threshold will also increase the burden on some self-employed people, who are required to pay the full 12.4 percent of the Social Security tax.

The Future of Social Security Tax

The attempts of Congress to try and remedy the potential future problems of Social Security could easily result in the tax being raised to much higher levels. President Trump has already promised not to cut benefits of the program, which most Americans of all types want to hear. He has also promised to increase benefits without raising the taxes, but it is still a possibility that the amount of Social Security taxes will be raised before long.

Social Security taxes could be raised by using one or two methods. Either the tax rate could be raised, or the cap could be raised higher or even eliminated. At present, the cap will continue to be raised in the next few years, as long as wages continue to grow.

FICA Rates Set by Law

The Federal Insurance Contributions Act (FICA) collects the taxes for Medicare and Social Security. The rates are set by law and can only be changed by changing the law. The Medicare tax that comes out of the paycheck is 1.45 percent and must be matched by employers. It is not subject to any kind of cap. These two taxes total 7.65 percent of a paycheck, and they must be matched by an employer. The self-employed must pay 15.30 percent for both. High earners must pay an additional 0.9 percent in Medicare taxes. This amount, called the Additional Medicare Tax, applies when married taxpayers make over $250,000 and file jointly, $125,000 when they file separately, and when singles and others make over $200,000.

Marginal Increase in Benefit Pays

The Social Security Administration (SSA) has announced that benefits for people on Social Security and for Supplemental Security Income (SSI) will be increased by just 0.3 percent in 2017. This affects 65 million people. The Social Security Act connects the yearly cost-of-living increase to the Consumer Price Index. These statistics come from the Department of Labor's Bureau of Labor Statistics.

In 2017, this means that the maximum amount that will be given for someone who has reached full retirement age is going to be $2,687 monthly. Last year, the maximum amount was $2,639 per month.

The annual limit was raised from $15,720 to $16,920 for 2017. When more than that amount is earned, the SSA withholds $1 in benefits for every $2 that is given. This limit was not increased last year, due to low inflation levels.

The SSA announced that the average January 2017 benefit payments for retired workers was $1,360. This figure is only an increase of $5 since 2016. In 2016, there was no increase given for cost-of-living, and in 2015, Social Security benefits only increased by 1.7 percent.

Income Tax Brackets

The IRS issued its new tax adjustments for 2017 in its Revenue Procedure 2016-55. When an employee’s income becomes subject to more taxes, it will affect some of their decisions. It may affect, for instance, how much money they place into a 401(k) plan which will reduce their taxable income. Or, they may decide to take part in a deferred income plan that is nonqualified, if their employer offers it.

Singles. Comparing 2016 to 2017 reveals an increase of $50 in a 10 percent tax rate, an increase of $300 at the 15 percent rate, a $750 increase at the 25 percent rate, an increase of $500 at the 28 percent rate, and an increase of $3,350 at the 33 percent, the 35 percent and the 39.6 percent levels.

Married Filing Jointly. Returns for 2016 and 2017 reveal that there is an increase of $100 for those at the 10 percent tax rate, an increase of $600 for people in the 15 percent tax range, an increase of $1,200 at the 25 percent level, an increase of $1,900 at the 28 percent level, an increase of $3,350 at the 33 percent level, and an increase of $3,750 at the 35 percent and 39.6 percent levels.

Married but Filed Separately. A comparison of the 2106 and 2017 rates shows the following increases: an increase of $100 at the 10 percent level, an increase of $300 at the 15 percent level, and increase of $600 at the 25 percent level, an increase of $950 at the 28 percent level, an increase of $950 at the 28 percent level, an increase of $1,675 at the 33 percent level, and an increase of $1,875 at the 35 percent and 39.6 percent levels.

Heads of Households. This category showed similar increases between the two years of 2016 and 2017: an increase of $100 at the 10 percent level, an increase of $400 at the 15 percent level, an increase of $1,050 at the 25 percent level, an increase of $1,700 at the 28 percent level, an increase of $3,350 at the 33 percent level, and an increase of $3,550 at the 35 percent and the 39.6 percent levels.

The same IRS document revealing the increase in taxes for 2017 also reveals that there will be increases in several other areas. These increases include: a rising of $50 for the single and married taxpayers standard deduction who file separately to $6,350, an increase of the standard deduction by $100 for taxpayers who are married and filing joint returns, and an increase in the standard deduction of $50 for heads of household to $9,350.

If you need help in understanding how the tax increases will affect you, or if you need to know how the Social Security tax limit applies in your situation, you can post your legal need on the UpCounsel’s marketplace. UpCounsel only uses lawyers who have graduated in the top five percent of the top law schools such as Harvard Law and Yale Law, and who also have an average of at least 14 years of legal experience. Many of them have worked with or on behalf of such companies as Google, Stripe, and Twilio.