Most workers pay Social Security taxes on all of their earnings. Some workers don't. The people who do not pay Social Security taxes on every dollar they make are higher earners. The reason they aren't taxed on all they earn is because of the "wage base limit."
The wage base limit is going up in 2024. Here's what that means and who will pay higher taxes because of it.
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What is the wage base limit?
Social Security is an earned benefit, with workers paying taxes on the money they earn and then receiving benefits equal to a portion of the average wages they were paid (and taxed on) over their careers.
Some people earn a lot of money -- millions of dollars a year. If they paid Social Security taxes on all of that income, their benefits would be based on their average wages of millions of dollars. As a result, they would get huge payouts from the government. To avoid this scenario, there's a cap on the amount of income subject to Social Security tax and a cap on the benefits that retirees receive.
The cap on the income subject to Social Security tax is called the wage base limit. If you make below this amount, you're taxed on every dollar earned at work. If you make more than the wage base limit, you only pay Social Security taxes up to the annual limit (although you still pay taxes for Medicare and, of course, ordinary income taxes on your entire salary).
The wage base limit is going up, so higher earners will owe more Social Security tax
The wage base limit is indexed to inflation. As a result, in many years, it has increased. That's happening in 2024. In 2023, the maximum income subject to Social Security tax was $160,200. In 2024, it's going up to $168,600. That means higher earners will pay Social Security tax on an additional $8,400 of the money that they make.
Social Security taxes are set at 6.2% for employees and 6.2% for their employers. This means that a worker who is taxed on $8,400 more of their money will pay an extra $520.80 out of their pocket, and their employer will do the same. Those who are self-employed and who pay the entirety of their Social Security taxes on their own will owe an extra $1,041.60 in Social Security taxes next year.
Most people will not be affected by this because only a small percentage of the country's earners make more money than the wage base limit. Still, it's important for those who are impacted by the change to be aware of the hit their paychecks will take in 2023 and to plan accordingly.
Social Security taxes are typically taken directly out of a worker's paycheck, so unless you are self-employed, you shouldn't need to take any direct action in order to pay the extra taxes due if you fall within the group of workers whose income exceeds $160,200. Just be aware of the fact you'll owe a higher tax next year and adjust your budget accordingly so you'll be ready.
