Each year, the federal government sets a limit on the amount of earnings subject to Social Security tax. In 2022, the Social Security tax limit is $147,000 (up from $142,800 in 2021). The maximum amount of Social Security tax an employee will have withheld from their paycheck in 2022 will be $9,114 ($147,000 x 6.2%).
Key Takeaways How the Social Security Tax Works Self-Employment Social Security Tax Limits History of Social Security Tax Limits Cost-of-Living Adjustment (COLA) Retirement Earnings Test Exempt Amounts Who Has to Pay Social Security Taxes?What Is the Social Security Tax Rate in 2022?Why Do I Pay Social Security Tax?What Is the Maximum Taxable Amount for Social Security Taxes?Who Is Exempt From Paying Social Security Tax? The Bottom Line
Social Security recipients will also receive a slightly higher benefit payment in 2022. The cost-of-living adjustment (COLA) was increased in October 2021 by 5.9% for 2022, compared with a 1.3% increase for 2021.
Key Takeaways
- Social Security tax is paid as a percentage of net earnings and has an annual limit.
- In 2022, the Social Security tax limit increased significantly, to $147,000. This could result in a higher tax bill for some taxpayers.
- The amount of the benefits received by individuals and couples rose to 5.9%.
- The largest social security tax increase was in 2021 but 2022 is high as well.
- The cost-of-living adjustment and the retirement earnings exempt amounts are other important changes that can affect an individual’s Social Security benefits.
How the Social Security Tax Works
The Social Security tax, also known as the “Old-Age, Survivors, and Disability Insurance (OASDI) tax,” funds the Social Security program in the United States. As of September 2021, more than 65 million people were receiving Social Security payments of around $1,439 per month. According to the SSA, approximately 70 million Americans will receive a slightly larger amount of $1,657 due to the cost-of-living adjustment in 2022.
The tax has two parts. The first is the payroll tax mandated by the Federal Insurance Contributions Act (FICA) and the self-employment tax mandated by the Self-Employment Contributions Act (SECA). Medicare tax, or “hospital insurance tax,” makes up the second part.
Payroll taxes are based on an employee’s net wages, salaries, and tips. These taxes are typically withheld by an employer and forwarded to the government on the employee’s behalf. In 2022, the Social Security tax rate is 6.2% for the employer and 6.2% for the employee.
Medicare taxes are split between the employer and the employee, with a total tax rate of 2.9% for both the 2021 and 2022 tax years.
Self-Employment
If you are self-employed, you pay Social Security taxes as part of the quarterly estimated taxes you submit to the Internal Revenue Service (IRS). In this case, as you are considered both the employee and the employer, you are responsible for paying the full 12.4%. However, the IRS allows self-employed individuals to deduct the employer portion of self-employment taxes from their taxable income.
While you work, the Social Security taxes you pay are used to fund benefits for existing beneficiaries. Ideally, once you become eligible, current workers will pay into the program so that you can collect benefits. The longer you wait to retire, the more benefits you should receive. However, the Social Security program is facing long-term financing shortfalls that could affect future benefits. Increasing the annual Social Security wage cap is one way to limit the shortfall, but it would not completely solve the problem.
The COLA increase of 5.9% is the largest rise in approximately 40 years.
Social Security Tax Limits
The government bases the annual Social Security tax limits on changes in the National Wage Index (NAWI), which tends to increase every year. The changes are intended to keep Social Security benefits on track with current inflation.
Any income you earn beyond the wage cap amount is not subject to a 6.2% Social Security payroll tax. For example, an employee who earns $165,000 in 2022 will pay $9,114 in Social Security taxes ($147,000 x 6.2%).
Keep in mind, however, that there is no wage base limit for Medicare tax. While the employee is only subject to Social Security tax on the first $147,00, they will have to pay 1.45% Medicare tax on the entire $165,000. Workers who earn more than $200,000 in 2022 are also subject to an 0.9% additional Medicare tax.
The combination of the increase in the Social Security tax limit and the additional Medicare tax for high-earners could result in lower take-home pay. Unfortunately, that means workers who earned over $200,000 in 2021 are at risk of owing more taxes in 2022.
Here is an example of how the Social Security limit works in 2021 and 2022:
| Social Security Tax Limit Example | |||||
|---|---|---|---|---|---|
| 2021 Income | 2021 Wage Cap | 2021 Social Security Taxes | 2022 Income | 2022 Wage Cap | 2022 Social Security Taxes |
| $145,000 | $142,800 | $8,854 | $145,000 | $147,000 | $8,990 |
History of Social Security Tax Limits
The Social Security tax rate rarely changes, as employees have been paying 6.2% since 1990. However, unlike the tax rate, the Social Security tax limit is adjusted annually.
The federal government increased the Social Security tax limit in 10 out of the past 11 years. The largest increases were in 2020 and 2021 when the limit increased by 3.6% and 3.7%, respectively. In 2022, the increase will be 2.9%.
Cost-of-Living Adjustment (COLA)
The COLA is an annual adjustment made to the Social Security benefit amount. It is measured by the Department of Labor’s Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Congress implemented annual COLA adjustments starting in 1975 when inflation rates were extremely high.
The COLA is 5.9% for 2022. This means that around 70 million recipients will see an increase in their monthly Social Security payments. The 5.9% increase is a big difference from past years. Individuals will receive on average $1,657 in their SSA benefits, and couples will receive on average $2,753 in 2022, thanks to the COLA increase.
Retirement Earnings Test Exempt Amounts
Workers who receive benefits before they reach full retirement age (FRA) are subject to the retirement earnings test. If your income exceeds certain thresholds, then Social Security will withhold benefits until you reach FRA. Like the Social Security tax limit, these thresholds typically increase annually with the national wage index.
There are two annual earnings test exempt amounts: one that applies to individuals younger than retirement age and one that applies to individuals who reach FRA during that year. For younger recipients, Social Security withholds $1 for every $2 in excess of their exempt amount. Individuals who reach retirement age will have $1 withheld for every $3 in excess of their exempt amount.
In 2022, the earnings test exemption amounts will increase to:
- $19,560 for individuals younger than the FRA
- $51,960 for those who reach their FRA
In other words, an individual who earns $19,560 ($51,960) or less in 2022 may be eligible to receive full Social Security benefits. This is up from $18,960 ($50,520) in 2021.
Who Has to Pay Social Security Taxes?
If you work as an employee in the United States, your employer will deduct Social Security taxes as part of your payroll. If you are self-employed, you are responsible for remitting your own Social Security taxes. Under both situations, most workers are required to contribute Social Security taxes up to IRS limits.
Under limited circumstances, some individuals may claim a qualifying religious exemption or temporary student exemption. Foreign government employees and nonresident aliens may also not be required to pay Social Security taxes. Last, individuals that don’t make enough money may also not end up paying Social Security.
What Is the Social Security Tax Rate in 2022?
The Social Security portion is taxed at 6.2% on earnings up to the maximum taxable amount, while the Medicare portion is taxed at 1.45%. In total, the combined rate is 7.65% up to maximum taxable amounts, with the maximum total taxable income amount having increased again in 2022.
Why Do I Pay Social Security Tax?
Workers pay Social Security taxes to support government programs in society. Social Security benefit payments issued by the government to retired individuals are funded using the aid of Social Security tax payments from current workers. When current workers retire, they will then become eligible to claim these government benefits in the future.
What Is the Maximum Taxable Amount for Social Security Taxes?
In 2022, the maximum taxable amount is up to $147,000 of income. Up to this amount, an employee is responsible for 6.2% of Social Security taxes and the employer is responsible for 6.2% of Social Security taxes. Self-employed individuals are responsible for both portions of the tax.
Who Is Exempt From Paying Social Security Tax?
Certain individuals may claim an exemption and not be required to pay Social Security taxes. Some religious groups that openly oppose Social Security benefits may claim a religious exemption. Non-resident aliens may be exempt depending on their type of visa. Students working at their university may be exempt. Last, workers for a foreign government may be exempt under certain circumstances. If you believe you may fall into one of these groups, consult your tax advisor.
The Bottom Line
Social Security is a significant benefit that helps millions of retirees, disabled individuals, and surviving spouses. The Social Security Administration adjusts benefits each year to keep up with inflation, which often means a bigger payment for recipients.
However, the annual increases may not be sufficient to sustain the program in future years. It isn’t wise to rely on Social Security to be your only source of income in retirement if you can save more. Many tax-advantaged savings accounts are available to build an additional nest egg.
