Don't Mess With Taxes

The coming wage base bump also means more FICA taxes for higher earners.

It looks like this man got the good news that his Social Security benefit will be larger next year. However, the tax news for high earners who are still working isn't as welcome. (Unsplash+ in collaboration with Getty Images)

The Social Security Administration (SSA) gave 71 million benefits recipients good news today. Next year, they'll get a 3.2 percent increase in their Social Security retirement benefits and Supplemental Security Income (SSI) payments.

The cost-of-living (COLA) bump means that retirees will, on average in 2024, see more than $50 per month in their Social Security checks.

Some still-working higher earners, however, aren't so thrilled with the SSA's news, which also included an increase in the amount of income subject to payroll taxes. In 2024, that will be $168,600.

That's an increase of $8,400 from this year's $160,200 in earnings, known as the Social Security wage base, that are subject to that retirement portion of the Federal Insurance Contributions Act (FICA) tax. The wage base applies to both salaried workers and the self-employed.

The bottom-line result for more well-paid workers is that they and their employers will be putting more payroll tax money next year into the Social Security trust fund, which pays for eventual retiree benefits.

If next year you make at least as much as the increased wage base of $168,600 for the entire 12 months, you'll pay $10,453.20 toward the government retirement program in 2024.

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, sometime this month — the annual earnings limit change technically is a cost-of-living, or COLA, amount.

And technically 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.

Most consumers are glad that inflation has eased from last year's record highs, which contributed to an also record-setting 8.7 percent Social Security benefit increase. The only slight downside of the easing of inflation is that the government benefits bump is smaller.

Still, no Social Security recipient is going to complain (too much; yes, I'm talking about my cranky older relatives) about this year's hike.

More government money from some paychecks: High-income workers with retirement still on the horizon, however, will kvetch about the associated higher Social Security wage base.

Those who $168,600 or more next year will see more of their earnings subject to payroll withholding.

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, which is what the wage base applies to, 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 calculations, both for 2023 and 2024 for comparison purposes, of the practical tax effects of the Social Security wage base on the amount taken out for the federal retirement benefits.

In 2023, if you earn the maximum wage base of $160,200 or more, you will pay a maximum Social Security tax of $9,932.40. That tax figure comes from your 6.2 percent portion of the current wage base.

Come 2024, if you make up to or more than the increased $168,600 wage base amount, your potential annual tax out-of-pocket, or more precisely out of paycheck, amount will be  $10,453.20. Again, the calculation is $168,600 X 6.2 percent.

So the $8,400 wage base increase next year results in $520.80 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, current 2023 tax year for you and your boss:

For the upcoming 2024 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 could pay up to a combined $1,041.60 (the previously mentioned $520.80 out of your paychecks, which also is paid by your employer) more in 2024 in Social Security taxes if you're paid up to the maximum wage base amount for the full year.

Tax ends for those making more: That maximum increased Social Security tax amount, however, is where this FICA component stops.

Earnings in excess of the annual wage base aren't subject to the Social Security payroll tax. Yep, earnings of $168,601 and more next year don't have any FICA tax taken from them.

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. That's the preferred "save Social Security" plan of the Biden Administration, as well as some members of Congress.

We'll have to wait to see whether it gets any more traction than usual this election cycle. My prediction is no. 

No income tax cap on Medicare: OK, I hear some of y'all who see withholding amounts for two government programs on your pay stubs and are wondering why I didn't show my math on the Medicare tax portion for 2023 and 2024. 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. 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 you make than $160,200 this year or $168,600 in 2024, the Medicare 1.45 payroll tax will keep coming out of all your pay and be 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 toward Medicare.

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 you 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:

• Being the boss tax basics
• Most people pay more payroll than income taxes
• House bill proposes ending federal tax on Social Security benefits

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