Don't Mess With Taxes

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

Running the numbers is important for everyone, but critical for older folks who rely on Social Security benefits, and the annual cost-of-living increases, to cover much of their expenses. (Photo by Getty Images via Unsplash)

There’s some good news for the more than 72.5 million recipients of Social Security payments. The Social Security Administration (SSA) today announced they’ll soon see an increase in their retirement and/or Supplemental Security Income (SSI) benefits.

Nearly 68 million retirees who receive monthly Social Security deposits will see a 2.5 percent cost-of-living adjustment (COLA) beginning in January 2025. On average, the retirement benefits will increase by about $50 per month starting next year.

The nearly 7.5 million people receiving SSI will see those payments increase by the same percentage on Dec. 31, 2024. Some people receive both Social Security benefits and SSI.

The SSA notes that over the last decade, the annual COLA increase has averaged about 2.6 percent. The COLA was 3.2 percent in 2024.

Higher wage earners will pay more tax: 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 2025, this amount, known as the Social Security wage base, will be $176,100.

That's an increase of $7,500 from this year's $168,600 in earnings that are subject to the Social Security retirement portion of the Federal Insurance Contributions Act (FICA) tax.

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

More government money from some paychecks: Payroll taxes, as workers who get regular paychecks know all too well, take a substantial bite out of the money they get each pay period.

If next year you make at least as much as the increased wage base of $176,100 for the entire 12 months, you'll pay $10,918 toward the government retirement program. So will your employer.

The total tax amount that goes toward Social Security and Medicare comes from the 15.3 percent taken out of your pay. But that percentage is split evenly between worker and employer.

The Social Security FICA tax portion is 12.4 percent, and applies to earnings up to the wage base. The remaining 2.9 percent is for Medicare, the government's medical insurance benefit. There is no income cap on the Medicare payroll tax component.

Since the payment is split, workers have 6.2 percent taken from paychecks each pay period for Social Security, and 1.45 percent for Medicare. The same percentages are matched by the workers’ employers.

Here are the calculations, both for 2024 and 2025 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 2024, if you make up to or more than the increased $168,600 wage base amount, your potential annual Social Security out-of-pocket, or more precisely out of paycheck, tax amount will be $10,453.20. The math calculation is $168,600 X 6.2 percent.

Next year’s larger Social Security wage base means your earnings up to $176,100 will be subject to a potential maximum FICA tax of $10,918.20. That math is $176,100 x 6.2 percent.

The bottom line is that higher-paid workers could put up to $465 more into the Social Security retirement fund in 2025.

Again, there is no income limit on the Medicare tax, so regardless of how much you earn, you and your employer each will pay 1.45 percent toward the medical portion of payroll tax. Also note that self-employed taxpayers pay both the employer and employee portion.

ACA tax add-on: Workers whose six-figure earnings are in excess of the Social Security wage base get a break on the retirement tax amount. They don’t have to pay any Social Security tax, either through paycheck payroll taxes or self-employment payments, on the amounts they make beyond $168,600 in 2024 or $176,100 in 2025.

But the other portion of the payroll tax could create another issue for them. Well-to-do taxpayers could face  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.

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.

Sort of an inflation adjustment: Although this annual Social Security adjustment sometimes is referred to as an inflation-based increase, 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.

And yes, that twisty connection is why I do include the Social Security wage base announcement in the ol' blog's annual 10-part inflation adjustments series, which should start, depending on word from the Internal Revenue Service, sometime this month. Until then you can refresh your memory of the 2024 changes.

As for this COLA amount, some Social Security beneficiaries might be grumbling a bit, or a lot if they’re like some of my cranky older relatives, about this year's hike. I get it. Things aren’t always easy when you’re on a fixed income. One analysis found that the monthly benefit increase, while welcome, won’t even cover a week of groceries for some.

Still, it’s something. And at least the inflation rate that contributed to the 2.5 percent hike has finally eased.

You also might find these items of interest:

• Most people pay more payroll than income taxes
• House bill proposes ending federal tax on Social Security benefits
• Some Social Security recipients owe tax on federal retirement benefits
• 9 states join Uncle Sam in taxing at least some Social Security benefits

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