How Much Is the Social Security Tax and Who Pays It?

Social Security’s Old-Age, Survivors, and Disability Insurance (OASDI) program limits the amount of earnings subject to taxation for

a given year. The same annual limit also applies when those earnings are used

in a benefit computation. This limit changes each year with changes

in the national average wage index. This amount is also commonly referred

to as the taxable maximum. Low-income Medicare beneficiaries can receive help with costs through an array of programs that pay all or part of their premiums. Payments varied by age group, ranging from an average of $675 for recipients aged under 18 to $468 for those aged 65 or older.

SSA then calculates the COLA by comparing the average of the CPI-W for July, August and September of the previous year with the average for the same three-month period in the current year. As of 2022, if you’re between age 62 and the calendar year during which you reach full retirement age, the Social Security Administration withholds $1 in benefits for every $2 of earnings in excess of $19,560. Full retirement age is the age at which you would receive 100% of your scheduled Social Security benefit. When it comes to taxes, most workers want to limit how much they pay. But in the case of Social Security taxes, the more taxes you pay, the more you can expect to receive in benefits later in life.

Social Security Tax Rates

As of December of the program’s first year, 1974, 70,900 blind and disabled children were receiving SSI. That number increased to about 955,000 in 1996, declined to about 847,000 in 2000, and increased to 1,108,612 in 2020. The relatively high average payment to children (compared with payments made to blind and disabled adults) is due in part to a limited amount of other countable income. The spike in average monthly benefits in 1992 is due to retroactive payments resulting from the Sullivan v. Zebley decision. As of December 2020, blind and disabled children were receiving SSI payments averaging $675.

• Save 25% when you join AARP and enroll in Automatic Renewal for first year.
• Most of the payroll taxes collected from today’s workers are used to pay benefits to today’s recipients.
• Some people are “exempt workers,” which means they elect not to have federal income tax withheld from their paychecks.
• The possible financial impact of another expensive drug surfaced with the recent F.D.A. approval of Leqembi, an Alzheimer’s drug that has shown more promising results than Aduhelm.
• The Social Security Administration (SSA) has announced that the wage base for computing the Social Security tax (OASDI) in 2021 will increase to $142,800.

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. 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.

Tax and accounting regions

But federal taxes will depend on your income, and many retirees won’t be able to avoid this type of tax. Your Social Security benefit amount is based on your income over the 35 highest-earning years of your career. The higher your income, the more you’ll receive in benefits — and the more Social Security taxes you’ll pay each year. Payments under SSI began in January 1974, with 3.2 million persons receiving federally administered payments.

When today’s workers retire, they’ll tap into the benefits being paid by tomorrow’s workers. We will mail COLA notices throughout the month of December to retirement, survivors, and disability beneficiaries, SSI recipients, and representative payees. But, if you want to know your new benefit amount sooner, you can securely obtain your Social Security COLA notice online using the Message Center in your my Social Security account. You can access this information in early December prior to the mailed notice. 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.

What is the Social Security retirement earnings test and how does it affect your benefits?

Social Security recipients will also receive a slightly higher benefit payment in 2023. The cost-of-living adjustment (COLA) was increased in October 2022 by 8.7% for 2023, compared with a 5.9% increase for 2022. Until 1975, it took a new act of Congress each time Social Security benefits were increased. In the 1970s, however, soaring inflation was quickly eroding the purchasing power of fixed pensions and benefits. The annual rate of inflation doubled to more than 12 percent between 1969 and 1974. SSA starts with the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), an official measure of the monthly price change in a basket of goods and services, such as food, energy and medical care.

For tens of millions of Americans, there isn’t a program that bears more importance to their financial well-being than Social Security. Some Alzheimer’s experts are not convinced that Leqembi will have meaningful benefits for patients, and there are concerns about side effects. Its cost, an expected $26,500 a year, not including related tests and doctors’ visits, may slow uptake. The possible financial impact of another expensive drug surfaced with the recent F.D.A. approval of Leqembi, an Alzheimer’s drug that has shown more promising results than Aduhelm. AARP is a nonprofit, nonpartisan organization that empowers people to choose how they live as they age. You are now leaving AARP.org and going to a website that is not operated by AARP.

Federal Benefit Rates (1/85 through 12/

But they also were building financial reserves to cover the expected cost of Aduhelm, a controversial, high-cost drug used to treat Alzheimer’s that the Food and Drug Administration approved. The drug would be covered under Part B because it is administered intravenously by health care providers. Medicare ultimately limited its availability, but the large premium increase in 2022 stuck. Social Security beneficiaries have experienced unusual volatility recently in the COLA and Part B premium changes. This year, the 8.7 percent adjustment was the largest in 40 years, and the Part B premium was reduced to walk back a 14.5 percent increase in 2022. The recent slowdown in inflation points to a 2024 Social Security cost-of-living adjustment, or COLA, of around 3 percent, according to a forecast by the Senior Citizens League.

If your monthly benefit amount was $2,000, you would lose your first five Social Security checks to the earnings test but collect checks for June (paid in July) through the balance of the year, he said. A comparison of income tax rates and ranges for 2021 and 2020 follows below. The 2021 rates are effective Jan. 1, and remain in effect through 2021 unless Congress passes new tax legislation. There is no limit on earnings under this test for workers who have reach or passed their full retirement age for the entire year. Think of the COLA as the “raise” that beneficiaries receive to true-up their payouts to account for inflation. To determine whether you’ll owe federal taxes, you’ll need to know your “provisional income.” This number is half your annual benefit amount plus your adjusted gross income and any nontaxable interest.

A total of 8.0 million persons received federally administered SSI payments. States have the option of supplementing the federal benefit rate and are required to do so if that rate is less than the income the recipient would have had under the former state program. The proportion of women among retired-worker beneficiaries quadrupled between 1940 and 2020. The percentage climbed from 12% in 1940 to 47% in 1980, 48% in 1990, and 51% in 2020. The proportion of women among disabled-worker beneficiaries more than doubled between 1957, when DI benefits first became payable, and 2020.

Analysts say the 2024 adjustment, which helps older Americans keep up with inflation, won’t be nearly as high as this year’s but will still be significant. Sign up for AARP’s monthly Money Matters newsletter to help manage your finances with confidence. Your employer is also responsible for paying half of the total FICA obligation.

• Sign up for AARP’s monthly Money Matters newsletter to help manage your finances with confidence.
• The maximum taxable amount is updated annually on the basis of increases in the average wage.
• Social Security cost-of-living adjustments, or COLAs, are based on third quarter data from the Consumer Price Index.
• There’s no income maximum there; $1.45 of every $100 you earn goes to Medicare.

Members may download one copy of our sample forms and templates for your personal use within your organization. Please note that all such forms and policies should be reviewed by your legal counsel for compliance with applicable law, and should be modified to suit your organization’s culture, industry, and practices. Neither members nor non-members may reproduce such samples in any other way (e.g., to republish in a book or use for a commercial purpose) without SHRM’s permission. To request permission for specific items, click on the “reuse permissions” button on the page where you find the item.

But keep in mind that 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. Payroll taxes withholding tax forms are based on an employee’s gross wages, salaries, and tips. These taxes are typically withheld by an employer and forwarded to the government on the employee’s behalf. In 2023, the Social Security tax rate is 6.2% for the employer and 6.2% for the employee.

The number of retired workers is projected to double in about 50 years. As a result, the Trustees project that the ratio of 2.7 workers paying Social Security taxes to each person collecting benefits in 2020 will fall to 2.2 to 1 in 2039. In 2010, tax and other noninterest income did not fully cover program cost, and the 2021 Trustees Report projects that this pattern will continue for at least 75 years if no changes are made to the program. However, the Trustees also project that redemption of trust fund assets will be sufficient to allow for full payment of scheduled benefits until 2034.