If you have recently reviewed your paycheck stub, you have likely noticed a withholding for the Social Security and Medicare taxes.
The Social Security tax covers Social Security benefits for those who receive retirement benefits or disability benefits every month. But did you know there is a limit to how much tax you might owe?
While the tax rate for Social Security is flat, there is a maximum amount that you will owe regardless of how much your income is.
Keep reading as we will explain everything you need to know about the Social Security tax and its limits.
What Is The Social Security Tax?
You might also hear this tax called the OASDI tax or the “old age, survivors, and disability insurance” tax. It is part of the FICA tax withholdings that both you and your employer are responsible for paying.
For self-employed individuals, they will need to pay both the employee and employer portion of the tax.
The Social Security Administration uses the funds from this tax to pay benefits to the more than 60 million people who receive monthly benefits through Social Security.
In addition, you are also required to pay the Medicare tax, which might also be called the hospital insurance tax. These payroll taxes are automatically withheld from your paycheck and used by the government to cover the costs of these benefits.
- The Social Security tax, you and your employer pay 6.2% of your gross taxable income.
- The Medicare tax is currently 1.45% of your wage base, resulting in a total FICA tax rate of 7.65% for your portion or 15.3% overall.
The money collected from these taxes is used by the SSA to fund benefit payments. While your employer automatically withholds these amounts, things are slightly different for self-employed people.
Self-employed taxpayers must pay these taxes to the IRS each quarter as part of their estimated taxes. Failure to do so may result in penalties and fines from the Internal Revenue Service and an even larger income tax bill when annual tax time rolls around.
High earners will be glad to know that there is an annual limit on the amount of Social Security tax due, and we will discuss that in the next section.
KEY TAKEAWAYS
- The Social Security tax (OASDI) is currently 12.4% of your gross taxable income, split equally between the employee and employer at 6.2%.
- There is a cap on the Social Security tax. After your income exceeds a certain threshold, you will no longer be subject to tax on the additional income.
- Every year, there is a cost of living adjustment (COLA) based on CPI. The income limits, retirement, SSI, and SSDI benefits will change (but not decrease) based on the COLA percentage.
Social Security Tax Limit 2024
In 2024, the wage base subject to Social Security taxes is $168,600. Any income earned above this limit in the calendar year will not be subject to Social Security taxes.
- So, the most an employee will have to pay in 2024 will be $10,453 ($20,906 if you are self-employed).
- These limits apply to self-employment, except you must pay both the employee and employer portion.
However, Medicare withholding is unlimited, and all earnings are subject to Medicare tax. People earning more than $200,000 may be subject to additional Medicare taxes.
If you work multiple jobs and all your income combined may have gone over the Social Security wage base, it is possible that you paid more than necessary. However, when you file your tax return, you should get a refund for the extra payments.
Must read articles related to Taxes
- The ins and outs of OASDI tax.
- What is the future of Social Security?
- Is there a way to opt out of Social Security?
- How does the Social Security Trust Fund work?
- What does married filing separately mean, and should you do it?
Basics Of The Cost-Of-Living Adjustment (COLA)
Though the Social Security tax rate has remained unchanged for many years, the wage base and tax limits usually change each year.
In addition, benefit payments are adjusted each year for inflation as well.
This is called the annual cost of living adjustment (COLA). These adjustments are authorized by Congress and are calculated using the consumer price index. In years where there is no rise in the CPI, then there are also no Social Security changes to benefit payments.
The COLA applies to retiree benefits, Supplemental Security Income (SSI), and SSDI benefits.
TIP
If you opt to receive retirement benefits early (and continue working), your monthly benefit amount will be reduced if your wage exceeds the annual limit.
The Retirement Earnings Test
Just like there is a maximum amount of tax you will have to pay, there is also a limit to how much you can earn while receiving benefits.
If you opt to receive retirement benefits early, your monthly benefit amount will be reduced if your average wage is over $22,320 in 2024. This means that if your taxable earnings are higher than the limit, the Social Security Administration will reduce your benefits.
For married couples, you may see a reduction in benefits as well. This is because spousal benefits can also be reduced due to your earnings.
If you think your taxable wages might be getting close to the limit, then you can use the Retirement Earnings Test calculator to help determine whether your benefits may be reduced.
Upon reaching full retirement age, the Social Security income limit is removed, and you can earn an unlimited income without seeing a reduction in benefits.
The Bottom Line
The Social Security tax is necessary to keep the program afloat and pay benefits to recipients. However, you can rest easy knowing there is a limit to the amount of tax you will have to pay.
In 2024, you only need to pay Social Security taxes on your first $168,600 of earnings. Once your income exceeds that, you must only pay standard income and Medicare taxes.
Frequently Asked Questions
The Social Security tax rate is 6.2%. Both the employee and employer must pay this percentage, so the SSA will receive 12.4% of your wages.
The Social Security tax limit in 2024 is $10,453. This means you will not be required to pay any additional Social Security taxes beyond this amount.
Medicare taxes are also collected at a rate of 1.45% for employees and employers for a combined amount of 2.9%. There is no limit to the amount of Medicare tax you can pay.
The Social Security wage base is the maximum income that is subject to the OASDI (Social Security tax).
The wage base for 2024 is $168,600. Once your income exceeds this amount, no additional Social Security taxes will be due.
If you exceed the Social Security income limit for taxes, your taxes will be capped at the limit.
If you receive benefits and exceed the income limit, your benefits will be reduced. Though you can work while receiving Social Security benefits, your monthly payments may be reduced if your income is too high.
Upon reaching full retirement age, there is no income limit to worry about.
When you file your annual tax return, the IRS will give you a refund for the taxes paid over the limit.
If the income is earned from a single employer, then the employer should stop withholding the tax when the limit is reached.
However, you can quickly pay more than the limit if your income is from multiple employers. That amount will be reflected on your tax return, and you will be due a refund of the excess Social Security withholding amount.
You can find a Social Security Administration office near you by using our SSA office locator and searching for your closest location.
