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Social Security recipients got good news earlier this week, as the Social Security Administration confirmed that the cost-of-living adjustment (COLA) that will show up in the benefit checks they receive in January 2023 will rise by the largest percentage since the early 1980s. Those who count on the program will appreciate the boost, given that they’ve had to pay the higher costs that inflation has caused throughout 2022.
The vast majority of the revenue that goes to pay Social Security benefits comes from the payroll taxes that workers and self-employed individuals pay. Although the tax rate isn’t changing in 2023, the amount of earnings on which that rate gets charged is going up — and that will boost the amount that high-income earners pay to help cover the program’s costs.
Most workers will pay roughly the same in Social Security payroll tax
For most workers, any changes in the amount of Social Security payroll tax they pay come from incremental changes to their wages or salaries. Employees have 6.2% of their taxable pay withheld from their paychecks to go toward Social Security. Sometimes, that amount is combined with the similar 1.45% payroll tax that goes toward the Medicare program, referred to by some employers as FICA withholding.
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In addition, employers are also required to pay a matching 6.2% in Social Security payroll taxes. That happens behind the scenes so that employees never see it. However, if you’re self-employed, you’re required to cover the full combined Social Security payroll tax of 12.4%.
Social Security payroll taxes only get charged up to a certain amount of earnings, known as the wage base limit. Above that, no further taxes are due. That’s consistent with the way Social Security benefits are calculated, as well, with credit given only up to each-year’s wage base limit.
The wage base limit usually goes up from year to year, based on changes in wages paid to U.S. workers. In 2023, the Social Security trustees expect the wage base to rise to $155,100, up $8,100 from 2022’s level.
Year
Social Security Wage Base
Change From Previous Year
2019
$132,900
+$4,500
2020
$137,700
+$4,800
2021
$142,800
+$5,100
2022
$147,000
+$4,200
2023
$155,100
+$8,100
Data source: Social Security Administration.
Here’s who pays higher taxes from the wage base limit increase
The vast majority of Americans won’t see any adverse impact at all from the wage base limit. If you make less than $147,000 both in 2022 and in 2023 and your wages stay the same, you’ll pay exactly the same amount of Social Security payroll tax. If you get a raise, then you’ll pay the same 6.2% rate on the increase in pay.
On the other hand, those who make more than $155,100 in both 2022 and 2023 will feel the full brunt of the tax increase. With an extra $8,100 getting taxed at 6.2%, employees will see their total Social Security payroll tax bill rise $502.20.
For those who make between $147,000 and $155,100, the amount of extra tax will depend on exactly where your earnings end up in 2022 and 2023. The closer to the upper limit you make from work, the closer your extra tax will be to the $502.20 figure.
High-income self-employed individuals could see the biggest bumps higher. For those with self-employed income over $155,100 in both years, the boost to their self-employment taxes due to the wage base limit increase will be $1,004.40.
Millions will be affected
A small percentage of workers earn enough to feel the brunt of the wage base limit’s impact on payroll taxes, but it’s still a sizable number. Based on the latest available numbers from the Social Security Administration, nearly 11 million employees earn at or above the wage base limit. Roughly 720,000 self-employed workers earned at least the maximum earnings subject to Social Security payroll tax.
Workers can expect the Social Security wage base to keep rising steadily year after year. That won’t affect most people, but high-income earners should get used to the idea of paying more to support the benefit increases that Social Security makes each January.
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