Millions of older Americans today collect a monthly benefit from Social Security. But as you might imagine, the money to fund the program has to come from somewhere. And that "somewhere" is your paycheck.
Of course, it's not just you. Whether you earn $20,000 a year or $200,000, you're helping to fund Social Security via payroll taxes. But there's a key difference in the context of Social Security between people earning $20,000 a year versus $200,000.
If you're in the former boat, your entire salary is subject to Social Security taxes. If you're in the latter category, you're not paying Social Security taxes on your entire $200,000 of earnings.
Next year, however, higher earners are likely to see their Social Security tax burden increase. But next year's change might also pale in comparison to a bigger shake-up some lawmakers want to implement.
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Prepare for a higher wage cap
Each year, there's an income limit set for the purpose of charging Social Security taxes known as the program's wage cap. This year, the wage cap sits at $168,600. This means that someone earning $200,000 a year won't pay Social Security taxes on $31,400 of income.
However, the wage cap for Social Security tends to rise each year. So come 2025, workers will likely be looking at a higher wage cap than $168,600.
For someone earning an average salary, that's not a big deal. But higher earners may need to brace themselves as they will likely need to part with more of their money.
We won't know what 2025's wage cap will look like until October. That's when Social Security will announce other key changes, too, like next year's cost-of-living adjustment and earnings-test limit.
Higher earners may be in for even more upheaval down the line
Those earning a large paycheck may grumble at the idea of having to pay more money into Social Security in 2025. But in reality, that change is nothing compared to President Biden's plan to charge Social Security taxes on earnings above $400,000.
Specifically, Biden's plan would keep the system of having a wage cap in place, and earnings above the wage cap but below $400,000 would be safe from additional Social Security taxes under his proposal. However, those taxes would start to apply to earnings above $400,000.
Biden feels strongly that this system is necessary to shore up Social Security's finances and prevent benefit cuts -- something the program might need to implement in about a decade without an alternate solution. That could leave a lot of people paying a lot more money into Social Security down the line.
One interesting question Biden will have to tackle is whether his proposal to tax wages over $400,000 for Social Security will result in higher monthly benefits for those being charged that extra money. There's a maximum monthly benefit Social Security pays, based on the current wage-cap setup. That maximum number might have to change to keep things fair.
Either way, if you're a higher earner, prepare to see your Social Security tax bill go up in 2025. To what extent is yet to be determined. But if you're worried about how that might impact your broad financial picture, the time to sit down and discuss that with a professional is now.
