2021 Wage Cap Rises for Social Security Payroll Taxes

This form will show the amount of benefits you received in the previous year and you can use this information when you complete your tax return to determine if your benefits are subject to tax. How much of your Social Security income is taxable is based on your combined income. Your combined income is calculated by adding your adjusted gross income, nontaxable interest, and one-half of your Social Security benefits.

Fourteen states subject at least a portion of Social Security to state taxes, one of which is scheduled to allow a full exemption in 2022. If you’re married filing jointly with earned income over $250,000, you’re subject to an additional tax. This also applies to married filing separately if your income is over $125,000. If you receive wages over $200,000 a year, your employer must withhold a .9% additional Medicare tax.

Forms & Instructions

From 2019 to 2021, the share of earnings subject to the Social Security tax fell by 2.1 percentage points. On an earnings base of $10.2 trillion in 2021, this translates into roughly $26 billion in lost revenue to Social Security. 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. Certain employers will also be eligible to claim a payroll tax credit for employees whom they continue to pay but are not working due to the crisis. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 reduced the contribution percentage to 4.2% for employees for those years; employers were still required to pay the full amount of their contributions.

Minnesota’s income tax uses federal adjusted gross income (FAGI) as the starting point for its state tax calculations. For taxpayers whose benefits are taxable federally, FAGI includes the taxable portion of their benefits, meaning Social Security is included in the income definition that is the starting point for Minnesota’s income tax. If you file your federal income taxes as a single person, and your combined income is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits.

What Are Social Security Wages?

Minnesota allows a subtraction for a portion of a taxpayer’s Social Security benefits that are subject to federal tax. A taxpayer may claim the subtraction in addition to the federal exclusion. Taxpayers may subtract a portion of their benefits that are taxable federally, up to a maximum established in law. Social Security payroll taxes are not collected on earnings over a set cap. In 2021, this cap was $142,800, so workers making more than this enjoyed the benefit of zero Social Security taxes on all earnings in excess of this cap. The United States does not have a federal level consumption tax, but most states and many municipal authorities have sales and use taxes.

• The consultancy noted, “There have been three years (2010, 2011, and 2016) with no COLA increase. Since 2009, the average COLA has been 1.75 percent with the highest being 5.8 percent in 2009.”
• An employee who makes $165,240 a year collects semi-monthly paychecks of $6,885 before taxes and any retirement-plan withholding.
• A taxpayer may claim the subtraction in addition to the federal exclusion.
• But since wage growth for top earners continues to outpace average wage growth, a growing share of total earnings is spilling over the cap and escaping taxation, eroding Social Security revenues.

It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. Any qualifying income above the Social Security wage base does not incur any Social Security taxes. So, when you calculate your combined income for Social Security tax purposes, your withdrawals from a Roth IRA won’t count as part of that income. That could make a Roth IRA a great way to increase your retirement income without increasing your taxes in retirement. If you’re concerned about your income tax burden in retirement, consider saving in a Roth IRA. Unlike many other retirement accounts, you save with after-tax dollars in a Roth IRA.

Paying Self-Employment Tax with Estimated Taxes

Medicare hospital insurance taxes continue to be withheld on 1.45% of all wages. The social security taxes for resident self-employed individuals are equal to 12.4% of the first USD 142,800 for 2021 and USD 147,000 for 2022. Medicare hospital insurance taxes are equal to 2.9% of all net self-employment income.

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Calculating FICA Taxes: An Example

Taxes under the Federal Insurance Contributions Act (FICA) are composed of the old-age, survivors, and disability insurance taxes, also known as social security taxes, and the hospital insurance tax, also known as Medicare taxes. Both of those findings rely on the Current Population Survey (CPS) to examine changes in hourly wages. However, the CPS makes it difficult—if not impossible—to examine what’s going on above the 90th percentile of the wage distribution.

Your job must also require you to remain a student for the exemption to qualify. This exemption only applies to income earned through the school-related job, not any other income. You also do not have to withdraw the funds on any specific schedule after you retire. These instead require you to begin withdrawals once you reach 72 or 73 years old, depending on when you turn 72 (if you turn 72 in 2023 or later, then your age is 73).

Topic No. 751, Social Security and Medicare Withholding Rates

Since $147,000 divided by $6,885 is 21.3, this threshold is reached after the 22nd paycheck. He elects to contribute $4,000 to his 401(k) plan, and his employer matches 25%, or $1,000. His Social Security wages are $20,000, but his elective deferral contribution is still understanding a balance sheet subject to FICA, and the additional amount contributed by the employer is not. The Social Security tax withheld from his pay is $1,240 ($20,000 x 6.2%). Special rules apply to workers who perform in-home services for elderly or disabled individuals (caregivers).