Don't Mess With Taxes

The Social Security Administration (SSA) gave retirees and other recipients of the program's payments good news this week. Next year, they'll bet the biggest benefits bump in decades.

Some higher earners, however, aren't so happy.

That government benefits announcement also noted that the amount of income subject to payroll taxes also is going up in 2022.

This amount, known as the Social Security wage base, is the maximum earnings, by both salaried workers and the self-employed, that are subject to that retirement portion of the Federal Insurance Contributions Act (FICA) tax.

In 2021, the wage base is $142,800.

On Jan. 1, 2022, it goes up to $147,000.

That means more money from both workers and their employers will go next year into to the Social Security trust fund, which pays for eventual retiree benefits.

If you make at least as much as that increased wage base next year for the whole year, you'll pay $9,114 in 2022 toward the government retirement program.

Sort of an inflation adjustment: Although this sometimes is referred to as an inflation-based increase — and yes, I do include it in the ol' blog's annual inflation adjustments series, which should start, depending on word from the Internal Revenue Service, later this month — the annual earnings limit change technically is a cost-of-living, or COLA, amount.

And it isn't indexed for inflation.

Instead, each year the SSA uses a specific formula to set the maximum taxable earnings level when a COLA is effective so that Social Security benefits can keep pace with, you guessed it, inflation.

For most of us, regardless of how we characterize it, the annual wage base hike doesn't make much of a difference. If we don't make near the six figures limit, our payroll taxes tend to be around the same year-to-year … unless we do get a big (really big) raise.

But for those who are raking in the big bucks, the annual wage base increase means more of their earnings are subject to payroll withholding.

Wage base tax ramifications for workers: The total FICA amounts that come out of salaried workers' paychecks and which is matched by their bosses is 15.3 percent.

The Social Security component is 12.4 percent. The remaining 2.9 percent is for Medicare, the government's medical insurance benefit. Each of those amounts is paid equally by workers and employers.

That means most of us working for wages have 6.2 percent taken from our checks each pay period for Social Security and 1.45 percent for Medicare.

Here are the numbers, both for 2021 and 2022, for the practical tax effects of the Social Security wage base.

First, this year's calculations. In 2021 if you earn the maximum wage base of $142,800 or more, you will pay a maximum Social Security tax of $8,853.60. That tax figure comes from your 6.2 percent portion X $142,800.

The same calculation applies to 2022. Next year, if make up to or more than the new wage base amount, your potential annual tax out-of-pocket, or more precisely out of paycheck, amount will be is $9,114.00. Again, that's $147,000 X 6.2 percent.

So the $4,200 wage base increase results in $260.40 more in taxes coming from your paychecks and into Uncle Sam's Social Security account next year.

Social Security total from both sides: Those amounts, however, are literally just half the Social Security tax story.

Remember, your employer matches your FICA taxes.

Here's how that plays out for Social Security withholding for the full 2021 tax year for you and your boss:

For the upcoming 2022 tax year, the total worker/boss Social Security payroll tax maximum amounts are:

As far as your annual income's bottom line, the SSA bump of the wage base means you and your employer will pay a combined $520.80 (the previously mentioned $260.40 out of your paychecks, which also is paid by your employer) more in Social Security taxes if you're paid up to the maximum wage base amount next year.

That amount, however, is where this FICA taxing component stops.

Earnings in excess of the annual wage base aren't subject to the Social Security payroll tax. For now. Every year when the trustees of the Social Security trust fund issue their annual report on the program's solvency, talk about increasing or even eliminating the wage base ramps up.

No income tax cap on Medicare: OK, I hear some of y'all who see two government program withholding lines on your pay stubs wondering why I didn't show my work on the Medicare tax portion for 2021 and 2022.

Here's why.

Like the Social Security tax, the 1.45 percent payroll tax that goes toward the federal medical insurance program for eligible folks age 65 and older also is paid by both workers and employers.

But unlike the Social Security portion, the Medicare tax isn't limited by a wage base. The law says there is no limit on wages that are subject to this combined 2.9 percent payroll tax for Medicare.

So no matter how much more than $142,800 you make this year or the excess of $147,000 in 2022, the Medicare 1.45 payroll tax will keep coming out of your pay and being matched by your boss.

ACA add-on: The Medicare tax also turns the tables on higher earners.

Where they are off the hook for any additional Social Security taxes after they make more than the annual wage base, they could be hit by the Medicare surtax.

The Affordable Care Act, aka the ACA or Obamacare, assesses a 0.9 percent additional Medicare tax on employees who, as single taxpayers, earn more than $200,000 or more than $250,000 if married filing jointly.

Those Medicare surtax earnings limits are not adjusted for inflation. They are set by the health care law.

And, yes, the ACA add-on tax is still in effect, despite desires of anti-Obamacare lawmakers (aka Republicans) to end it. It's also not matched by employers, but is borne only by the well-paid affected workers.

The bottom line is that all of us pay FICA's Social Security and Medicare taxes on at least some of our income. And the wealthier among us now pay 0.9 percent more.

Self-employment is covered, too: If all this payroll tax talk has you thinking maybe you'll quit your wage-slave job and start your own business so can avoid the FICA taxes, think again.

If you scroll up to the top of this post (I know, I'm long winded, even when typing), you'll see a self-employment mention.

The Social Security and Medicare taxes also must be paid by most earners of self-employment income. This includes full-time entrepreneurs, as well as people who turn to side hustles to supplement their salaries.

Yes, it's a pain. Welcome to being a boss. Or hiring a tax pro to take care of your new business' payroll and other tax tasks.

But you'll be glad you paid the taxes when you eventually get around to collecting your Social Security benefits.

You also might find these items of interest:

• 5 tax tips for freelancers, gig economy workers
• Most people pay more payroll than income taxes
• Most Americans OK with higher taxes for the rich

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