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Retirement Planning > Social Security

Get ready to pay $500 more in Social Security taxes

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It’s tax time again, and President-elect Donald Trump and his fellow Republicans in Congress have promised to slash them — especially for corporations and the rich

For millions of Americans, however, a tax increase will be the first thing they see. About 12 million workers will pay more this year because of an automatic adjustment in their payroll taxes. Unlike previous years, this rise in the Social Security “taxable minimum” — the amount of income subject to tax — is a whopper: 7.3 percent, the most in 34 years. That could cost each affected worker as much as $539, and much more if they’re self-employed.

See also: 20 Social Security tax facts you need to know

Why is 2017’s increase so huge? And where does this taxable minimum come from, anyway? Let us explain. 

What’s changing this year?

Workers at the top of the income spectrum pay Social Security payroll taxes only on a portion of their wages. For the past two years, only the first $118,500 of earnings was subject to the 6.2 percent tax. In 2017, this taxable minimum jumps to $127,200.

How much could this cost me?

If you make less than $118,500, you won’t notice a difference. But if you earn more, an extra $8,700 could now be subject to the 6.2% Social Security payroll tax, costing you as much as $539 more by the end of the year. Employers, who pay their own 6.2 percent tax on payrolls, will see costs rise, too — self-employed workers could see their Social Security tax burden jump to more than $1,000. As always, however, they’re able to deduct the employer portion on their income tax returns. 

What’s the total price tag to U.S. households?

About $11.6 billion in new tax revenue could come from the change in 2017, the Social Security Administration estimates.

Why such a big increase?

A 7.3 percent hike is way above inflation: The main U.S. consumer price index was up 1.7 percent in the 12 months ended in November (the latest data available), and it rose just 0.7% in all of 2015. So what’s going on here? Well, the Social Security taxable minimum is adjusted annually based on an index of U.S. wages, not consumer prices. The National Average Wage Index was up 3.5% in 2015, five times faster than inflation.

But the real reason for this sudden, steep hike is simply that the government is making up for lost time. The 2017 hike is essentially two years of wage gains packed into one. The wage index also rose 3.6 percent in 2014, but the Social Security Administration couldn’t raise the taxable minimum last year because rules prevent an increase from happening in a year when Social Security recipients don’t get a cost-of-living increase.

Millions of Americans will soon see a tax increase due to an automatic adjustment in their payroll deduction. (Photo: iStock)Millions of Americans will soon see a tax increase due to an automatic adjustment to their Social Security payroll deduction. (Photo: iStock)

How unusual is a 7.3 percent increase?

It’s the largest percentage rise since 1983. When the Social Security tax began in 1937, it applied only to the first $3,000 earned, an amount that remained steady until 1951. Congress then periodically raised the taxable minimum until laws in the late 1970s began indexing it to wage growth.

Adjusted for inflation, the rise in the taxable minimum looks less dramatic. You can still, however, see the impact of substantial rises in the 1960s and 1970s, which helped pay for Social Security benefit increases for middle-class and upper-middle-class Americans.

How many people are affected?

About 12 million will pay more because of the higher minimum this year, the SSA estimates, out of 173 million workers paying into Social Security. In any given year, about 6 percent of all workers make more than the taxable minimum, a number that’s been consistent for decades. The SSA estimates that almost 20 percent of workers reach the taxable minimum at some point in their careers, even if it’s only for one year.

Why does the taxable minimum exist?

The U.S. income tax was envisioned as a progressive tax, with the wealthiest supposedly bearing the largest tax burden and the lowest-income Americans paying nothing or even receiving tax credits. The Social Security payroll tax is unusual in that lower-income Americans end up paying a greater share of their income than the rich. 

The main idea is that the Social Security taxes you pay should more or less correspond with the benefits you eventually receive. The benefit formula is progressive, however, with lower- and middle-income workers getting bigger Social Security checks relative to what they put in than the wealthy. No matter how much you contribute, the most you can get from Social Security this year is $2,687 per month. 

See also:

10 of the weirdest tax laws from around the world

Social Security trust funds: running low [infographic]

How to maximize Social Security benefits for women

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