On January 1, 2022, the maximum amount of an individual’s earnings that will be subject to Social Security tax will increase to $147,000. This is up from $142,800, which was the wage cap in 2021. So, what exactly does this mean for employers, employees, and the self-employed?
We break it down for you below.
What is the Social Security Tax?
Need a little refresher on Social Security tax? Here are the details you need to know:
- The Social Security tax is also known as the Old Age, Survivors, and Disability Insurance tax (OASDI tax)
- Employers and employees each pay Social Security tax at a rate of 6.2 percent of the employee’s earnings (so that a total of 12.4 percent is collected by the government in Social Security taxes from both the employer and the employee), but there is a maximum amount of taxable income (also known as a wage cap) that cannot be exceeded; we’ll get into this in detail below
- Self-employed individuals are required to pay 12.4 percent of wages in Social Security taxes
- Social Security taxes are used to fund Social Security benefits, payments made to retired individuals in the U.S.
- The Social Security tax is part of the FICA tax (which is made up of both the Social Security tax and the Medicare tax)
- The Social Security Tax is also part of payroll taxes (which are made up of five different taxes (each) for employers and employees)
- The Social Security tax is also part of the self-employed tax (which is made up of both the Social Security tax and the Medicare tax for self-employed individuals)
What kind of earnings are subject to the Social Security tax?
Wages, salaries, bonuses, and tips are all subject to the Social Security tax.
What’s the wage cap on the Social Security Tax?
The Social security Tax is a regressive tax, which means that the tax takes a larger percentage of lower income than it does of higher income (as opposed to a progressive tax which takes a larger percentage from a high-income earner than from a lower-income earner).
There is a wage cap (or maximum) on the amount that is subject to the tax, so any amount that exceeds the cap is not taxed.
In 2021 the wage cap was 142,800. In 2022 the wage cap will increase to $147,000. Here’s an example of how this works:
Jamie is a social media marketer at Hero Companies, and she earns a salary of $130,000 per year. In 2022, she will get a $10,000 bonus. Her wages that are subject to Social Security tax in 2022 are $140,000.
$130,000 + $10,000 = $140,000
For tax year 2022, Jamie will pay $8680 in Social Security taxes:
6.2% of $140,000 = $8680
Her employer will match that amount.
Maxine is a developer at Hero Companies, and she earns $160,000 per year. In 2022, she will get a $25,000 bonus. Her wages that are subject to Social Security tax in 2022 are $147,000 (because of the wage cap).
$160,000 + $25,000 = $185,000
But, taxable wages for Social Security tax in 2022 may not exceed $147,000.
For tax year 2022, Maxine will pay $9114 in Social Security taxes:
6.2% of $147,000 = $9114
Her employer will match that amount.
Why is the wage cap increasing in 2022?
This is known as a cost of living adjustment (COLA).
Each year, the Social Security Administration (SSA) reviews the wage cap and often (but not always) makes adjustments for cost of living, so that the retired individuals who are receiving funds from their Social Security account can receive enough money to keep up with inflation and increases in cost of living. The SSA posted this 2022 fact sheet to detail the changes.
In order to increase Social Security payments and benefits (to keep up with cost of living), the amount paid into Social Security (by employers, employees, and the self-employed) must increase, as well.
A worker who retired in 2021 at full retirement age, received up to $3,148 per month; this has increased in 2022: a worker who retires in 2022 at full retirement age will receive up to $3,345 per month.
So, exactly how much will I be expected to pay in Social Security Taxes in 2022?
If you are an employee: you will be required to pay 6.2% of your earnings up to $147,000 in social Security taxes; if you make more than this, any amount that exceeds 147,000 will not be subject to the Social , so the maximum amount you will be subject to for the 2022 tax year will be $9114.
If you are an employer: you will be required to pay 6.2% of each employee’s wages up to $147,000 (per employee) in Social Security taxes, so the maximum amount for the 2022 tax year will be $9114 per employee.
If you’re self employed: you will be required to pay $12.4 of income earned (gross revenue minus tax deductions) up to $147,000. However, for self-employed individuals, there is another wrinkle; Social Security tax combined with the Medicare tax make up what’s called the self-employed tax. Typically, only 92.35% of income earned is subject to self-employed tax. You can read all about it here.
How does this compare to years past?
Check out the table below that details how the Social Security tax has affected employers and employees in the 21st century:
|Year||Social Security tax rate for employers and employees (each)||Maximum earnings subject to Social Security tax||Maximum amount employees and employers (each) pay in Social Security tax|