Have you ever wondered where the money that allows so many Americans to live off Social Security comes from? The answer is more than clear: from each resident’s tax return. This program, which has become a safety net for millions of seniors, depends directly on the contributions we all make during our working years. However, not everyone contributes in the same way, and this is where wage differences and payroll taxes come into play.
There is a big difference in how this tax affects those who earn less versus those who earn much more. If your salary is $20,000 a year, every cent of that income will be subject to Social Security tax. Now, if you earn $200,000 a year, only a portion of your income will be taxed, because there is a maximum limit that is updated every year.
What will happen in 2025.
As every year, this income limit changes, and is known as the “wage limit,” which defines how much of your salary can be taxed. For 2024, that cap is $168,600. This means that if you earn more than that amount, you do not pay Social Security taxes on the “excess” (that is, if you earn $200,000, that $31,400 is not subject to taxes). This cap is set to be higher for next year (2025), although this figure will not be known until October.
For those who earn less than $168,600, this change will not make a big difference because they are already paying taxes on all of their income, (this means that the percentage they are charged will not change for next year).
A new plan on the horizon
In addition to the regular changes to the salary cap, there could be a bigger reform on the horizon. Former President Joe Biden has proposed a measure that would tax Social Security income above $400,000 a year (but the catch is that incomes between $168,600 and $400,000 would still be exempt).
According to the Biden Administration, this measure is intended to ensure that Social Security has enough money to continue benefiting users in the future (since Social Security’s coffers are expected to run out in less than 10 years, so leaders must start looking for solutions if they do not want to start cutting payments to beneficiaries).
Will they earn more in retirement by paying more?
This is one of the points that has not yet been clarified: will those who have contributed more to the banking sector receive more in retirement? In the current system, there is a maximum limit on the monthly benefits you can receive, and this is linked to the salary cap. If this change is implemented, it may be necessary to adjust this limit to maintain equity.
Do I have to do something about it?
If you are one of those who earn a lot of money, it is time to plan, with the help of a financial advisor, how these changes can affect you, both now and for your retirement (you will have to be prepared and adjust your savings well!)
The date on which the change will be proposed will be in October, so you still have time to organize your finances and make the most of them (always complying with the law, please).
In any of the possible scenarios, if you are one of those lucky people who earns more than $400,000, be prepared to take on a larger tax liability for 2025, because you will most likely have to do the math on how much tax you will have to pay this year. It is important to realize that the larger salary amounts are the ones that have to do the most work!