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Each year, the Social Security Administration establishes a Social Security wage base, determining how much of your salary is subject to Social Security tax. The Social Security wage base for the 2018 tax year was $128,400.
Have you ever looked at your pay stub and wondered why so much Social Security tax gets withheld from your wages? Or maybe you’ve heard about “paying into” Social Security while you work so that you can receive benefits in retirement, but you don’t really know how that works.
Once you know how the Social Security wage base works, you’ll be able to make better sense of what you’re paying.
Social Security tax
To understand the Social Security wage base, it’s important to first know how Social Security tax works and why you pay it.
Social Security and Medicare make up the Federal Insurance Contributions Act, or FICA, taxes. These taxes help fund retirement and healthcare benefits for retired and disabled Americans and help support the families of people who have passed away.
The current rates for FICA-mandated taxes are 12.4% of your gross wages for Social Security and 2.9% of your gross wages for Medicare. But those rates are split between you and your employer. So when calculating your paycheck, your employer withholds 6.2% of your pay for Social Security and 1.45% for Medicare, and then matches those percentages from its own pocket.
There’s no wage base limit to the amount of Medicare taxes you pay — you’ll pay a flat rate of 1.45% of your wages. And if you earn more than $200,000, you’re subject to a 0.9% additional Medicare tax.
But there is a limit to the amount of income on which the Social Security tax is applied. That limit is the Social Security wage base.
Social Security wage base for 2018
Every year, the Social Security Administration, or SSA, releases the Social Security wage base. The limit shifts annually based on changes in the national average wage index.
This number serves two purposes.
- It establishes the maximum amount of an individual’s income that will be subject to Social Security taxes during a year.
- It helps in calculating Social Security benefits.
The Social Security wage base increases nearly every year. For 2018, the Social Security wage base was $128,400. For 2019, it’s increased to $132,900.
So what does that look like in real numbers? Let’s say you earned $130,000 from your job in 2018 and didn’t have any pre-tax benefits, like a 401(k) or flexible spending arrangement. Your employer would have withheld about $7,961 (6.2% of $128,400) from your wages. Once you paid in that amount, your employer wouldn’t have withheld any more Social Security taxes from your paycheck in 2018. You might even have noticed a little boost to your take-home pay on your last paycheck.
For 2019, that same gross salary is below the Social Security wage base ($132,900), so your employer would withhold $8,060 (6.2% of the entire $130,000) from your wages.
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Reaching the limit
As your income exceeds the Social Security wage base, your employer is supposed to stop withholding Social Security tax from your paycheck.
But if you work for more than one employer, or have a side hustle in addition to your day job, you should keep the Social Security wage base in mind. Different employers might not be aware that you’ve reached the limit collectively, which means they might continue withholding Social Security tax until the end of the year, or until your wages with that employer reach the wage base.Keep reading: Credit Karma Guide to Filing Taxes for Your Side Hustle
You can ask your employers to stop withholding Social Security taxes once you’ve paid up to the wage base or wait until you file a tax return. Depending on the situations, you may be able to request to receive any excess amount you paid for Social Security tax as a refund, or you could be able to take the excess as a credit against your income tax.
Social Security wage base for the self-employed
If you’re self-employed, the Social Security wage base still applies, but how you pay FICA-mandated taxes is different.
If you are self-employed, you’re responsible for paying the full 12.4% of Social Security tax (up to the Social Security wage base) and 2.9% Medicare tax on your net earnings. These make up the self-employment tax, which you calculate on Schedule SE and attach to your individual tax return.
Fortunately, self-employment taxes are calculated on your net self-employment income, not your gross income, and the wage base limit still applies for Social Security taxes. Say you earned $90,000 from your business but had $10,000 in business expenses; the combined self-employment tax rate of 15.3% (12.4% Social Security + 2.9% Medicare tax) would be applied to your net earnings of $80,000.
You’ll also get two other breaks on your self-employment taxes.
- When calculating self-employment tax, your net earnings from self-employment are reduced by half the amount of your total Social Security tax.
- You can deduct half of your Social Security tax from your gross income on your federal income tax return. This is taken as an adjustment to income on Line 27 of Schedule 1 attached to your Form 1040.
These self-employed rules are designed to replicate the treatment of Social Security taxes for an employee, for whom an employer’s share of Social Security taxes is not considered wages.Learn more about paying taxes when you're self-employed
Social Security was designed to help ensure financial security for older and disabled Americans. It’s important to understand how the Social Security wage base works, and how your Social Security benefits will supplement your own retirement savings.
You can open an account on the Social Security Administration’s site to review your latest earnings statement, see your earnings history and estimate your benefits in retirement.