Social Security system rests on the premise that you contribute towards it (in the form of Social Security tax) in your working years and it takes care of you in your retirement years. You need to pay Social Security tax annually on all of your earnings, or the Social Security tax is withheld from each of your monthly paychecks. However, you may not need to pay the tax full year, thanks to the Social Security tax limit. If your salary is high, you are more likely to hit the Social Security tax limit for the year before the end of the year. In such a case, not all your monthly paychecks may be subject to Social Security tax.
Social Security Tax Limit – also called Social Security wage base limit – is the maximum amount of a worker’s income that is subject to Social Security tax. In other words, workers pay into the Social Security system until their income reaches the Social Security tax limit. Any income above the limit is not subject to Social Security tax.
The Social Security tax limit changes every year in accordance with the national average wage index. An increase in the national average wage index means more income is subject to Social Security tax.
In 2023, this limit was $160,200, but it has increased to $168,600 in 2024. It means if you earn more than $168,600 in 2024, you won’t have to Social Security tax on the earnings above that. The limit was $106,800 in 2010, $76,200 in 2000 and $51,300 in 1990.
In the last five years or so, the limit (or Social Security wage base) has increased on average by $3,960 per year. From 2023 to 2024, however, the jump was $8,400. Though the increase was more than the average, it was significantly less than the $13,200 increase from 2022 to 2023, which was the biggest ever.
Owing to the increase in the Social Security tax limit in 2024, the tax amount on Social Security has increased from $9,932 to $10,453. It means that people with income more than $168,600 in 2024 will pay $521 more in Social Security taxes compared to what they would have paid had the wage base remained at $160,200.
A point to note is that just as workers don’t pay into the Social Security system beyond the limit, the Social Security Administration (SSA) also doesn’t consider earnings beyond the limit towards calculating future retirement benefits. This is the reason why there is a limit to the maximum Social Security benefit. For instance, the maximum Social Security benefit at FRA (full retirement age) this year is $3,822 per month.
As said above, the Social Security Tax Limit is the maximum earning that is subject to the Social Security tax. Once your income goes above this limit, you stop contributing to Social Security in that year.
The limit is $168,600 in 2024. So, once your income for the year goes beyond the limit you are not taxed by Social Security. If your income is less than the limit, all your monthly paychecks will be subject to the tax. High earners, on the other hand, pay into the system only until their pay reaches the Social Security taxable maximum.
Even high earners, however, usually reach a taxable limit until closer to the end of the year. Very high earners hit the limit well before the end of the year. So, if you fall in the last category, it is possible that you have already made $168,600 or more in 2024, and thus, are done paying into the Social Security for the year.
Even if your salary is not very high, but you work in an industry that pays robust bonuses you may hit the limit sooner. Suppose your monthly pay is $30,000 and you received $80,000 in bonus in March. The bonus amount pushes your income above the limit, and thus, you won’t be paying the Social Security tax after March 2024.
A point to note is that if you earn through multiple jobs, each of your employers is required to withhold Social Security taxes from your wages until you reach the tax limit at that individual job. In such a case, you will be allowed to claim a refund for the extra Social Security taxes withheld at each job, at the time of filing your tax return.
To know if your income has hit or exceeds the limit, you need to check your overall earnings. You have to scan all your income sources, including salary, self-employment earnings and other taxable compensation. Understanding the composition of your income to efficiently manage your Social Security tax liability will also help you to maximize your savings by efficiently managing.
The Social Security tax or the Social Security payroll tax is 6.2% (your employer also contributes 6.2% on any taxable wages). If you are self-employed you pay the full 12.4%, but you can deduct the employer-equivalent portion of that amount. The tax collected helps to fund the Social Security program, which provides workers with disability, survivor and retirement benefits.
A point to note is that though there is a limit to the Social Security tax, there is no limit on the Medicare tax. Workers are required to pay 4.5% Medicare tax, which is also matched by employers. Those with annual income above $200,000 pay an additional 0.9% Medicare tax (not matched by employers). Medicare tax for a self-employed person is 2.9%.
