The Social Security Tax Limit Explained | Full Guide

If you’ve been reviewing your paycheck recently, you’ve probably noticed a tax withholding for your Social Security tax and Medicare tax. The Social Security Tax covers social security benefits for those who receive monthly retirement or disability benefits. But did you know that there is a limit to the amount of taxes you can owe? Although the Social Security tax rate is fixed, there is a maximum amount you will need regardless of the amount of your income. Read on because we’ll explain everything you need to know about social security tax and its limits.

What is the social security tax?

You may also hear this tax called the OASDI tax or “Old-Age, Survivors and Disability Insurance” tax. This tax is part of the FICA withholding that both you and your employer are required to pay. In the case of self-employed workers, they will have to pay a part of the tax to both the worker and the employer. The Social Security Administration uses funds from this tax to pay benefits to more than 60 million people who receive monthly benefits through Social Security. In addition, you must also pay Medicare tax, which may also be called 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 social security taxes, both you and your employer pay 6.2% of your gross taxable income. Currently, the Medicare tax is 1.45% of base pay, resulting in a total FICA tax rate of 7.65% for your portion or 15.3% overall. The SSA uses the money collected from these taxes to fund benefit payments. While your employer automatically withholds these amounts, things are slightly different for self-employed individuals.

Self-employed taxpayers must pay these taxes to the IRS each quarter as part of estimated taxes. Failure to follow this precaution can result in penalties and fines from the Internal Revenue Service and an even larger income tax bill when it comes time for annual taxes. High-earning workers will be happy to know that there is an annual cap on the amount of social security taxes to be paid, and we’ll talk about that in the next section.

2021 tax cap for social security

In 2021, the salary base subject to social security contributions reaches a limit of $142,800. This means that any income earned above this limit in the calendar year will not be subject to social security taxes. Thus, the maximum amount you will have to pay in 2021 will be $8,853.60. However, there is no limit for Medicare tax withholding. In fact, people who earn more than $200,000 may be subject to additional Medicare taxes. The earnings limit does not apply to Medicare, which makes all earnings subject to Medicare tax. These same limits also apply to self-employment. If you work multiple jobs and all of your combined earnings may have exceeded Social Security’s wage base, you may have paid more than you need. However, when you file your tax return, you should receive a refund for the extra payments.

Cost of Living Adjustment (COLA) Basics

Although the social security tax rate has remained the same for many years, changes to the salary base and tax limits are generally made each year. In addition, benefit payments are also adjusted annually for inflation. 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 the years in which there is no increase in the CPI, there are also no changes in social security for the payment of benefits. COLA applies to retirement benefits, Supplemental Security Income (SSI) benefits, and SSDI benefits.

The retirement income test

Just as there is an upper limit to the amount of taxes you will have to pay, there is also a limit to what you can earn by receiving benefits. If your median salary is above the 2021 cap of $18,960, your monthly benefit amount will be reduced. This means that if your taxable income is above the limit, the Social Security Administration will reduce your benefits. For married couples, you may also see a reduction in benefits. This is because marital benefits may also be reduced due to your earnings. If you think your taxable wages may be approaching the limit, you can use the Retirement Earnings Test Calculator on SSA.gov to determine if your benefits may be reduced. Upon reaching full retirement age, the Social Security earnings limit is removed and you can earn unlimited earnings without seeing a reduction in benefits.

The bottom line

The social security tax is required to keep the program afloat and pay benefits to beneficiaries. 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 have to pay Social Security taxes on your first $142,800 of earnings. Once you exceed your income, you will only have to pay regular income taxes and Medicare taxes.

Frequent questions

How much is the social security tax?

The Social Security tax rate is 6.2% Both the worker and the employer have to pay this percentage, so the SSA will receive a total of 12.4% of the salary. The social security contribution limit in 2021 is $8,853.60. This means that you will not have to pay any additional social security taxes beyond this amount. Medicare taxes are also collected at a rate of 1.45% for both the employee and the employer. There is no limit to the amount of Medicare tax that can be paid.

What is a Social Security Salary Base?

The social security wage base is the maximum amount of income that will be taxed for social security purposes. For 2021, the salary base is $142,800. Once your income exceeds this amount, no additional social security tax will be paid.

What happens if the social security income limit is exceeded?

If you exceed the Social Security income limit for taxes, your taxes will simply be capped at the limit. If you are receiving benefits and exceed the earnings limit, your benefits will be reduced. Although you can work while receiving Social Security benefits, your monthly payments may be reduced if your income is too high. When you reach full retirement age, there is no income limit to worry about.

How to obtain a refund of social security taxes paid in excess of the limit?

When you file your annual tax return, the IRS will reimburse you for taxes paid in excess of the limit. If the income is received by a single employer, the employer must stop withholding the tax once the limit is reached. However, if your income comes from multiple employers, you could easily pay more than the limit. This amount will be reflected on your tax return and you will be owed a refund of excess social security withholding.