Once your wages are above a certain threshold, you can cease contributing to Social Security for the remainder of the year. You read it correctly; all your earnings may not be taxed on Social Security if you earn a high salary. Workers contribute to Social Security until their annual income hits the Social Security tax cap.
What Is the Maximum Social Security tax?
The highest amount of wages due to the Social Security tax is the Social Security tax cap. In 2023, the Social Security maximum taxable amount is $160,200. Workers are subject to a 6.2% Social Security tax on their wages up to $160,200 per year.
When Do You Stop Making Social Security Contributions?
Most workers contribute 6.2% of their annual wages to the Social Security system, which their employers match. Self-employed employees pay 12.4% of their earnings into Social Security. However, high earners only contribute to Social Security until their income hits the maximum taxable amount, which in 2023 is $160,200.
Earnings over $160,200 are not subject to Social Security taxation or utilized to calculate future benefits. Once you hit the maximum taxable earnings, your employer will cease withholdings, resulting in a larger paycheck, explains Mike Biggica, a certified financial planner and founder of Pixel Financial Planning in San Francisco. Your employer’s payroll department will monitor this limit and cease withholding for Social Security.
What Is the Maximum Social Security Tax Amount?
A person who earns at least $160,200 in 2023 contributes $9,932.40 to Social Security, and his or her employer contributes the same amount. In 2023, self-employed persons earning more than the maximum taxable amount must contribute $19,864.80 to Social Security.
Verify the correct amount was withdrawn at the end of the year, advises Bradley Clark, a licensed financial adviser and the founder of Clark Asset Management in Andover, Massachusetts. Ensure you do not overpay due to an employer mistake or several employment.
How Has the Tax Cap on Social Security Changed Over Time?
The Social Security maximum taxable amount is changed annually to account for variations in average salaries. The tax limit for 2023 is $13,200 more than the maximum taxable amount for 2024, which was $147,000, and $53,400 higher than the limit for 2010, which was $106,800. In 2000, the highest taxable amount was $76,200, compared to $51,300 in 1990.
What Happens When Your Income Exceeds the Maximum Taxable Amount?
As soon as your earnings surpass the maximum taxable amount for the year at specific employment, Social Security taxes will no longer be withheld, and your paychecks will increase. There is no longer a Social Security tax deduction.
Suppose you earn more than the maximum taxable amount through numerous occupations. In that case, each of your employers must deduct Social Security taxes from your pay until you reach the maximum taxable amount for that particular employment. However, you can receive a refund for Social Security taxes withheld more than the annual maximum when you file your tax return.
According to Ken Cornutt, certified financial advisor and founder of Westside Financial in Los Angeles, Social Security may be over-withheld if you have numerous employers or change employment during the year. The IRS would provide a refund if too much money was withheld during the year.
Federal Tax Withholding From Your Social Security Benefit
By completing IRS Form W-4V, those who owe Social Security taxes can submit quarterly estimated tax payments to the IRS or decide to have federal taxes withheld from their benefit. Scott Newhouse, a certified financial advisor at Forthright Finances in Thousand Oaks, California, advises individuals to deduct contributions directly from their paychecks to simplify their lives.
Keeping track of quarterly payments is an additional task. You can have 7%, 10%, 12%, or 22% of your monthly Social Security check deducted for taxes.
State Income Taxes on Social Security Benefits
A few states tax Social Security income, but the majority do not. According to information services firm Wolters Kluwer’s state tax study, Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia tax Social Security income. Some seniors with lesser incomes may not be liable for the Social Security tax.
Some states do not impose an income tax, while others do not tax Social Security benefits. There is a partial exemption in a few states, according to Barbara Weltman, an attorney and author of “J.K. Lasser’s 1001 Deductions and Tax Breaks 2023.” You must consult with your state. Most Social Security recipients do not have to pay state income taxes on their benefits, even if they are taxed at the federal level.
Reduce Social Security Taxes
There are several methods for retirees to remain below the Social Security tax limits. To reduce taxable income, retirees might make significant withdrawals from their retirement accounts before enrolling in Social Security and then take lesser amounts after enrolling. If you donate a necessary minimum distribution from your IRA to charity, the distribution is not considered income and does not affect the taxation of your Social Security payments.
The earnings from part-time work might send you over the Social Security tax threshold. Alexandra Baig, a certified financial adviser at Companions On Your Journey in Brookfield, Illinois, advises, “When deciding when to start collecting Social Security, you should consider tax.” According to Baig, it is usually a good idea to defer receiving Social Security if you are still working.
Because distributions are not considered taxable income, investing for retirement in a Roth IRA or Roth 401(k) or transferring your assets to a Roth account can also help you manage your Social Security tax burden.
According to Todd Porterfield, a certified financial planner and founder of Fairchild Capital in Portland, Oregon, the Roth IRA may be a very effective strategy for minimizing Social Security taxes. Withdrawals from a Roth IRA are not included in the total income calculation.