The most you can pay in Social Security taxes for 2020 is $8,537.40. This is what you pay if you earn $137,700 or more.
As its name suggests, the Social Security tax goes to the Social Security program. It amounts to 6.20% on all income up to $137,000. Employers deduct the tax from paychecks and match it, so that 12.4% goes to the program for each employee. If you’re self-employed, you’ll pay the total 12.4%, though you can deduct half on your tax return.
The earnings limit is called the Social Security Wage Base, and it typically goes up every year. The annual rise began in 1972, when the wage base was $9,000.
What Is the Social Security Tax Limit?
You aren’t required to pay the Social Security tax on any income beyond the Social Security Wage Base. In 2020, this limit is $137,700. As a result, you’ll pay no more than $8,537.40 ($137,700 x 6.2%) in Social Security taxes.
This is an increase from 2019, when the limit was $132,900 and the most you could pay was $8,239.80.
Keep in mind that this income limit applies only to the Social Security or Old-Age, Survivors and Disability (OASDI) tax of 6.2%. The other payroll tax is a Medicare tax of 1.45%, and you’ll have to pay that for all income you earn. In fact, for income over $200,000 ($250,000 for couples filing jointly), the Medicare tax rate rises to 2.35%.
What Is the Social Security Tax?
The OASDI tax is the amount of money taken from your earned income to pay for Social Security benefits. You give up a portion of your salary, and your employer has to pay a matching portion as well. Employees and their employers across the country pay to fund the benefit payments that retirees receive. The idea is that you contribute to Social Security benefits throughout your career. Then, once you retire, current workers will keep contributing to the fund while you receive benefits. That way, the system can sustain itself.
The OASDI tax and Medicare tax are housed under the Federal Insurance Contributions Act (FICA), which is why the FICA acronym may show up on your paycheck.
The Social Security tax is part of why your Social Security benefit is higher if you wait longer to retire. If you delay your retirement until you reach your full retirement age (FRA), then you will have been paying the tax for longer. (Furthermore, the later you start claiming benefits, the less time the system will have to pay you those benefits.) Working longer might also mean that your 35-year average income will be higher, which would also increase your benefit amount.
Other Key Social Security Increases in 2020
Along with the wage base, the retirement earnings test exempt amount rises every year. The exempt amount applies to people who are receiving benefits but have not reached full retirement age (FRA). If you earn more than this amount, the Social Security Administration (SSA) will withhold $1 in benefits for every $2 you earn above the limit. The amount is higher the year you reach FRA, and the SSA will withhold $1 in benefits for every $3 you earn above the limit.
For workers that have yet to reach their FRA, the 2020 earning limit is $18,240, up $600 from the 2019 amount. If it’s the year you will reach your FRA, the limit is $48,600, up $1,680 from 2019.
Another number that generally increases every year is the benefit amount, which gets a cost-of-living adjustment (COLA). For 2020, the COLA was 1.6%, which means that retirees who were receiving $1,479 every month in 2019 are receiving $1,503 every month in 2020. Similarly, married couples who were receiving $2,491 per month are now receiving $2,531.
Despite valid concern about a depletion of funds in the near future, the idea behind Social Security benefits is easy enough to understand. You pay into it while you work, and it pays you back once you stow your briefcase for good. For most salaried employees, the tax you pay is 6.2%. However, that only applies to income you earn up to $137,700; income in excess of that Social Security Wage Base won’t be subject to the tax.
Tips for Navigating Retirement
- If all of the age thresholds and eligibility requirements and conditions for your Social Security benefits have you feeling overwhelmed, you may be interested in using our Social Security calculator. You can fill in your information, and we’ll do the rest. We’ll let you know what you can expect in annual benefits once you retire.
- Social Security isn’t intended to be your sole source of retirement income – you should also have retirement savings. To make sure these savings are on pace to meet your income needs, it’s a great idea to work with a financial advisor who can develop a financial plan and help you invest. SmartAsset’s free advisor matching tool can connect you to a local financial advisor today. There’s no obligation and it’s free.
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