2024 Social Security Tax Limit

Maximum earnings subject to Social Security taxes now $168,600

Reviewed by David KindnessFact checked by Vikki VelasquezReviewed by David KindnessFact checked by Vikki Velasquez

The federal government sets a limit on how much of your income is subject to the Social Security tax. For 2024, the Social Security tax limit is $168,600 (up from $160,200 in 2023). The maximum amount of Social Security tax an employee will have withheld from their paycheck in 2024 is $10,453.20 ($168,600 x 6.2%). This is up from $9,932.40 ($160,200 x 6.2%) in 2023.

Key Takeaways

• Social Security tax is paid as a percentage of gross earnings and has an annual limit.
• Individuals pay Social Security taxes through payroll deductions while self-employed individuals are responsible for paying both the employee and employer portions on their own.
• The Social Security tax limit increases to $168,600 in 2024, up from $160,200 in 2023, which could result in a higher tax bill for some taxpayers.
• The Social Security Administration increased the benefit amount by 8.7% for 2023 and 3.2% for 2024.
• 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

According to the Social Security Administration (SSA), in 2022, about 70.6 million people per month received Social Security benefits, with an average benefit of $1,681 per month. Benefit recipients received a slightly larger amount of $1,848 in 2023 due to the cost-of-living adjustment (COLA). The estimated amount for 2024 is $1,907 per month.

These payments are funded by the Social Security tax, which is also known as the Old Age, Survivors, and Disability Insurance (OASDI).

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 gross wages, salaries, and tips. These taxes are typically withheld by an employer and forwarded to the government on the employee’s behalf. Currently, 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 the current tax year.

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, since 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.

The Social Security taxes you pay while you work 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 up to age 70, the more benefits you will receive.

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.

Important

The cost-of-living adjustment (COLA) of 8.7% for 2023 was 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 Average 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 $170,000 in 2024 will pay $10,453.20 in Social Security taxes ($168,600 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 $168,600 in 2024, they will have to pay 1.45% Medicare tax on the entire $170,000. Individuals who earn more than $200,000 are also subject to a 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. That means workers who earned over $200,000 in 2023 are at risk of owing more taxes in 2024.

Here is an example of how the Social Security limit works:

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 eight out of the past 10 years. The largest increase was in 2023 when it was raised almost 9% from $147,000 in 2022 to $160,200 in 2023.

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 was 8.7% for 2023 and is 3.2% for 2024. This means that Social Security recipients will see an increase in their monthly Social Security payments in 2024. Individuals will receive an average of $1,907 for their SSA benefits, and couples will receive, on average, $3,033 in 2024, 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 exemption amounts. The first applies to individuals younger than retirement age and the other 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 2024, the earnings test exemption amounts increase are:

• $22,320 for individuals younger than the FRA
• $59,520 for those who reach their FRA

In other words, an individual who earns $22,320 ($59,520) or less in 2024 may be eligible to receive full Social Security benefits.

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. Lastly, individuals who don’t make enough money may also not end up paying into the Social Security system.

What Is the Social Security Tax Rate in 2024?

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.

Why Do I Pay Social Security Tax?

Workers pay Social Security taxes to support government programs. Social Security benefit payments issued by the government to retired individuals are funded using Social Security tax payments from current workers. When current workers retire in the future, they will become eligible to claim these government benefits.

What Is the Maximum Social Security Tax for 2024?

In 2024, the maximum taxable amount for Social Security taxes is up to $168,600 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. Lastly, workers for a foreign government may be exempt under certain circumstances. If you believe you may fall into one of these groups, consult a tax advisor.

The Bottom Line

Social Security is a significant benefit that helps millions of retirees, surviving spouses, and people with disabilities. The Social Security Administration adjusts benefits each year to keep up with inflation. The maximum taxable earnings for Social Security in 2024 is $168,600.

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—though not everyone can save more.

Read the original article on Investopedia.