If you have taken a look at your paycheck stub recently, then you have likely noticed a withholding for the Social Security tax and Medicare tax. The Social Security tax covers Social Security benefits for those who receive retirement benefits or disability benefits on a monthly basis. But, did you know that 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 that 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. This tax 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.
When it comes to the Social Security tax, you and your employer both pay 6.2% of your gross taxable income. The Medicare tax is currently 1.45% of your wage base, thus arriving at a total FICA tax rate of 7.65% for your portion or 15.3% altogether. The money collected from these taxes is used by the SSA to fund benefit payments. While these amounts are automatically withheld by your employer, things are a little different for those who are self-employed.
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 that is due, and we will discuss that in the next section.
2021 Social Security Tax Limit
In 2021, the wage base that is subject to Social Security taxes hits a limit at $142,800. This means that any income earned above this limit in the calendar year will not be subject to Social Security taxes. So, the most you will have to pay in 2021 will be $8,853.60. However, there is no limit to your Medicare withholding. In fact, people earning more than $200,000 may be subject to additional Medicare taxes. The earnings limit does not apply to Medicare, and this makes all earnings subject to the Medicare tax. These same limits apply to self-employment as well. 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.
Basics Of The Cost-Of-Living Adjustment (COLA)
Though the Social Security tax rate has remained unchanged for many years, there usually are changes to the wage base and tax limits 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 is applied to retiree benefits, Supplemental Security Income (SSI) benefits, and SSDI benefits.
The Retirement Earnings Test
Just like there is a maximum to the amount of tax you will have to pay, there is also a limit to how much you can earn while receiving benefits. If your average wage is more than the 2021 limit of $18,960, then your monthly benefit amount will be reduced. 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 as a result of your earnings. If you think your taxable wages might be getting close to the limit, then you can use the Retirement Earnings Test calculator at SSA.gov 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 that there is a limit to the amount of tax you will have to pay. In 2021, you only need to pay Social Security taxes on your first $142,800 of earnings. Once your income goes beyond that, you will only need to pay regular income taxes and Medicare taxes.
Frequently Asked Questions
How much is Social Security tax?
The tax rate for Social Security tax is 6.2% Both the employee and employer must pay this percentage, so the SSA will receive a total of 12.4% of your wages. The Social Security tax limit in 2021 is $8,853.60. This means that 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 both employee and employer. There is no limit to the amount of Medicare tax that can be due.
What is a Social Security wage base?
The Social Security wage base is the maximum amount of income that will be taxed for Social Security purposes. For 2021, the wage base is $142,800. Once your income exceeds this amount, no additional Social Security taxes will be due.
What happens if you exceed the Social Security income limit?
If you exceed the Social Security income limit for taxes, then your taxes will simply be capped at the limit. If you are receiving benefits and exceed the income limit, then 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.
How can you get a refund for Social Security taxes paid in excess of the limit?
When you file your annual tax return, the IRS will give you a refund for the taxes paid in excess of 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, if the income is from multiple employers, then you could easily pay more than the limit. That amount will be reflected on your tax return, and you will be due a refund of the excess Social Security withholding amount.