Although the Social Security tax rate hasn’t changed since 1990, the amount of one’s earnings that are subject to Social Security tax changes from year to year. The amount liable to Social Security tax is capped at $142,800 in 2021 but will rise to $147,000 in 2022.
The change to the taxable maximum, called the contribution and benefit base, is based on the National Average Wage Index. The increase for 2022, at 2.9 percent, is less than the 3.7 percent increase for 2021. These annual limits are also applied to the computation to calculate Social Security benefits based on one’s earnings along with other factors.
What is the Social Security tax rate?
The Social Security tax rate has remained the same since 1990, the last time it was increased. Workers contribute to the Social Security Trust Funds through payroll taxes, the Federal Insurance Contributions Act (FICA) tax, and for the self-employed, the Self-Employment Contributions Act (SECA) tax. Workers also pay into the Medicare’s Hospital Insurance (HI) program as part of the FICA and SECA taxes.
For those who earn a wage or salary, they share the 12.4 percent Social Security tax equally with their employer on their net earnings. The maximum taxable amount for the Social Security tax is $142,800 in 2021. Likewise, the 2.9 percent Medicare’s Hospital Insurance tax is split equally but there isn’t an earnings limit for the tax.
For example, an employee that earns $150,000 pays 6.2 percent of the first $142,800 he or she earns, or $8,854, and the employer would put in the same amount for a total of $17,708 for Social Security. However, both would contribute $2,175, or 1.45 percent of $150,000, for a total of $4,350. Generally, an employer will withhold what an employee owes from a paycheck and send the amount due for both to the government.
The self-employed with net earnings of $150,000 must pay the full 12.4 percent on $142,800 of net earnings in 2021, $17,708, and 2.9 percent on the whole $150,000, or $4,350. However, the self-employed are allowed to deduct half of the SECA tax as a business expense.
How do Social Security contributions work?
In order to receive Social Security retirement benefits, a worker must earn 40 credits, but can only accumulate a maximum of 4 per year. Some workers can reach that amount in ten years, but the longer you work, the higher your monthly benefits payment should be.
The Social Security Administration uses the average of 35 highest-earnings years as part of their computation, years not worked count as a zero income year lowering the average. As well, a worker can retire at 62 if they have their 40 credits, but they will receive lower monthly payments. If that worker continues working until reaching full retirement age, they will receive considerably more each month. In order to receive the maximum possible monthly benefits, a worker needs to keep working until they are 70 years old.
The Social Security taxes you pay from your earnings during your working years fund benefits for existing beneficiaries along with the Social Security Trust Funds. In 2021,there are approximately 176 million workers who are employed in jobs covered by the Old-Age, Survivors, and Disability Insurance (OASDI) tax. They cover the benefits of around 65 million Americans who are receiving benefits in 2021.
According to the Social Security Administration that translates to 2.7 covered workers per each Social Security beneficiary currently. But by 2035 that number will reduced to a ratio of 2.3 to each beneficiary. There are worries about the long-term viability of the program and whether financing shortfalls could affect future benefits. Lawmakers are considering legislation to ensure the health of Social Security until a longer-term solution can be developed to guarantee benefits into the future.