Certain Individuals May Face an Increase of $930 in Social Security Tax Contributions by 2025. Why You Shouldn't Panic.
Certain Individuals May Face an Increase of $930 in Social Security Tax Contributions by 2025. Why You Shouldn't Panic.
Social Security beneficiaries will receive a 2.5% increase in their benefits, known as the cost-of-living adjustment (COLA), in January 2025. This rise will boost the average monthly check from $1,927 to $1,976. However, this isn't the only change coming in 2025. The Social Security Administration adjusts various numbers annually based on inflation data, affecting more than just retirees.
Workers might observe some shifts in 2025 as well. For some, this could result in a larger tax bill. But there's no need to be overly concerned about it.
The threshold for Social Security payroll taxes increasing
Many people are unaware that the government doesn't levy Social Security payroll tax on all income from work each year. In 2024, it only taxes this income on the first $168,600 earned. Since this high limit usually results in most individuals paying Social Security tax on all their income, only high earners who make more than $168,600 are exempt from taxes on any income above this amount. However, this extra income also does not contribute to boosting their Social Security benefits in retirement.
The administration adjusts this threshold for Social Security payroll tax annually. In 2025, it will rise to $176,100. Consequently, some affluent workers might be obligated to pay taxes on an additional $7,500 in earnings in 2025, but this doesn't equate to paying $7,500 more in taxes.
The impact of the rule change on high earners' taxes
The Social Security payroll tax rate is 12.4%, with each party bearing half of the tax (employee and employer). If an employee must pay this tax on an additional $7,500 in 2025, this amounts to an extra $465 ($7,500 x 6.2% in Social Security payroll taxes).
Self-employed individuals must bear the full 12.4% tax, though they can deduct half of the self-employment taxes they pay on their income tax return. As a result, the higher ceiling on Social Security payroll taxes in 2025 will cost self-employed individuals an additional $930.
Although this may seem nominal to some, if you're concerned about covering all your financial obligations, don't overlook this increased tax when planning your 2025 budget.
If your income falls between the $168,600 subject to Social Security payroll tax in 2024 and the $176,100 in 2025, subtract the difference between your income and $168,600. Then, multiply this by either 6.2% or 12.4% depending on your payroll tax share, to calculate your increased tax bill in 2025. For example, if you earn $170,000, the extra tax you'll pay will amount to about $87 if you're traditionally employed.
No significant change for those under the limit
If your income is below $168,600, you won't experience much of a difference in 2025. You'll still pay Social Security payroll taxes on all your income, and all your job income will contribute to enhancing your future Social Security benefits.
If you get a raise, you might inadvertently pay more Social Security payroll taxes in 2025. But the additional money you earn in this case will significantly outweigh the amount automatically withheld from your paychecks to cover your increased Social Security tax.
The increase in the Social Security payroll tax threshold to $176,100 in 2025 could mean higher taxes for some affluent workers, leading to an additional $465 in payments for employees or $930 for self-employed individuals. For those earning between $168,600 and $176,100, the increased tax bill depends on their income level.
With the Social Security payroll tax threshold increasing, retirees should consider the potential impact on their retirement savings and financial planning, ensuring they take this increased expense into account when creating their 2025 budget.