Payroll taxes are Social Security's most important funding source, as they provide the bulk of the money the entitlement program receives. Virtually all workers pay Social Security taxes in the United States, and the amount you pay directly determines the amount of benefits you receive in your later years.
So exactly how much will you pay in taxes next year to fund Social Security? The amount depends upon your income -- but, surprisingly, there's a maximum limit.
That maximum is going up in 2021, but the tax increase won't affect the majority of Americans. Here's what you need to know about the highest possible amount of Social Security tax that could be collected next year -- and about why the change to the tax limit probably won't affect you.
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This is the maximum Social Security tax you could pay next year
For 2021, the maximum Social Security tax you could owe is $8,853.60 for those who earn W-2 income from an employer. For self-employed workers who pay both their own portion of the tax and the employer's portion, the maximum Social Security tax bill is $17,707.20. This is up from $8,537.40, which was the maximum Social Security tax in 2020 for those who earn W-2 income.
The vast majority of Americans won't owe anywhere near that much money, though. In order to pay the maximum $8,853.60 in 2021, you'd need to earn $142,800 or more. You'll pay this amount no matter how much over this limit you earn, even if your annual income adds up to millions of dollars. And if you earn less than this amount, you'll pay 6.2% of your earnings, or 12.4% if you're self-employed.
Why is there a maximum Social Security tax?
The maximum Social Security tax limit exists because of the "wage base limit." This annual limit both caps the amount of taxes workers owe and the amount of their wages that count toward determining the size of their Social Security checks.
The Social Security benefits formula takes into account average wages in your 35 highest-earning years when determining the amount of benefits to pay you. Since Social Security is supposed to be an earned benefit, with workers getting back retirement income based on the amount they pay in, the wage base limit caps the amount people pay, so those with millions in annual wages don't end up with huge monthly checks totaling tens of thousands of dollars per month. Instead, people pay in up to the wage base limit, and they get credit only for that amount when their benefits are determined.
There have been proposals to change that, including by President-elect Joe Biden. But doing so would alter the fundamental structure of the program and so is likely to be a hard sell. Unless or until Congress signs a law lifting the wage cap, there will be a maximum Social Security tax determined by the annual wage base limit.
Because the limit is changing for 2021, the maximum Social Security tax is going up. In 2020, the wage cap was $137,700. Since Social Security payroll taxes are set at 6.2% of income (with employers also paying 6.2%), that created a maximum tax of $8,853.60 in 2020, or double that amount for the self-employed who pay both their own taxes and their employer taxes. In 2021, the wage base limit is going up to $142,800, which results in the new limit of $8,853.60, or $17,707.20 for the self-employed.
Of course, unless you earn $142,800 or more, you won't have to worry about paying the maximum in 2021. And if you don't earn more than last year's limit of $137,700, your Social Security tax will stay the same for another year if your earnings stay the same.
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What's the Maximum Tax You'll Pay to Fund Social Security in 2021? - Motley Fool
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