Social security helps millions of seniors each year to stay afloat. The program isn't self-financing. It needs revenue to keep it afloat.
Social Security's main source of income is the payroll tax it collects. You'll see a significant portion of your paycheck go to Social Security if you look closely.
However, if your income is higher than the minimum wage, you might not have to pay tax. This is because Social Security taxes are based on the wage cap.
The wage cap in 2021 is $142,800. Earnings above that amount are not subject to Social Security taxes. The wage cap will rise in 2022. This means that you might have to give up more of your income.
Be prepared for a tax increase
Social security taxes are 12.4% of your earnings, up to the annual wage limit. As a salaried worker, you are responsible for half the amount. Your employer will pay the rest. You are responsible for the 12.4% if you are self-employed.
In 2022, the Social Security wage cap will be $147,000. This is an increase of $4,000. If their earnings are sufficiently high, salaried workers will have to pay $260.40 more in Social Security taxes next year. Self-employed workers will be responsible for $520.80.
If your earnings exceed the next year's wage limit, your total Social Security Tax bill will be $9,114. If you split that tab with your employer, it will come to $9,114. If you're self-employed, you'll lose $18,228. Ouch.
Why are higher income earners not paying more Social Security taxes?
Social security is in serious trouble. Legislators must make a proposal to increase the wage cap, or eliminate it entirely. Higher earners could see their taxes rise if that happens.
It's not as easy as it seems to raise the wage cap, or get rid of it. Social security benefits are determined by workers' earnings history, and seniors have a maximum benefit. The maximum benefit would have to increase if the wage cap was raised. This could lead to a situation where Social Security loses out on extra revenue.
Get ready!
Taxes are part of daily life. This includes taxes that you pay into Social Security. If your earnings exceed the updated wage cap, you should be prepared to pay a higher tax bill, especially if you are self-employed.
There are also steps you can take that will lower your tax burden, so that you don't get as much from higher Social Security taxes. Maximizing your IRA and 401(k) plans could help you shield more income from the IRS. The same applies to funding a health savings plan if you are eligible.
No one wants to have to pay taxes. The silver lining is that your taxes will pay for your retirement. This will allow you to receive a monthly benefit that covers your expenses in your senior years.
