Although Social Security has been around for quite some time, the program’s rules have a tendency to evolve. In fact, each year, Social Security generally undergoes a number of changes based on inflation.
Next year, for example, seniors on Social Security will be getting an 8.7% cost-of-living adjustment (COLA). That’s the largest raise to come through in decades, and it’s based on soaring inflation that hammered consumers during 2022’s third quarter.
Next year, workers who claim Social Security before full retirement age will also be able to earn more money without it affecting their benefits. Given that some beneficiaries may have returned to a job in some capacity to cope with higher living costs, that’s a good thing.
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But one big incoming Social Security change is directed at workers — not seniors receiving benefits. And if you’re a higher earner, it’s a change you really need to know about.
You might lose more money to Social Security
Social Security’s primary revenue source is payroll taxes. But workers don’t automatically pay Social Security taxes on all of their income. Rather, there’s a wage cap that’s set every year, and earnings beyond that threshold aren’t taxable for Social Security purposes.
This year, the wage cap sits at $147,000. But next year, it’s rising to $160,200. This means that workers will pay Social Security taxes on another $13,200 of earnings.
Now the good news is that salaried workers don’t have to cover their entire Social Security tax bill themselves. Rather, they get to split that burden with their employers.
But still, the Social Security tax rate is 12.4%. So if you’re a higher earner who’s now looking at taxes on another $13,200 of income, it could mean losing an extra $818.40, with your employer also paying an extra $818.40. That’s not a small amount of money, so it’s the sort of thing you’ll want to prepare for.
And also, if you’re self-employed, it means you have to cover your entire Social Security tax bill alone. So in that case, you’re looking at paying an extra $1,636.80 in Social Security taxes next year.
Granted, if you’re a really high earner — say, you have an income of $700,000 — then an extra $818.40 in Social Security taxes may not impact your finances all that much next year. Rather, it’s people who are right on the edge of the wage cap who are more likely to get hurt by this change.
Let’s say you earn a salary of $162,000, but money is actually tight because you have multiple dependents and you live in an expensive city to have access to a job that pays you that much. In that case, losing an additional $818.40 to Social Security taxes in 2023 could be a blow.
Either way, it’s important to stay apprised of Social Security changes even if you’re not collecting benefits, and even if you’re not planning to do so for a very long time. You never know when a change might occur that impacts your finances directly.
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