Paying taxes is never fun, but one thing that makes many taxpayers more comfortable is the idea that the more money you make, the more in taxes you'll pay. The U.S. has a relatively progressive income tax system, with multiple tax brackets that go up as your income rises.
However, when it comes to Social Security payroll taxes, the situation is much different. The federal government takes money out of every employee's paycheck at the same flat percentage rate of 6.2% for Social Security. Moreover, there's a maximum amount above which no additional tax gets charged -- essentially meaning that the rich get to stop paying this tax at some point during the year even as those of more modest means end up paying it all year long. Below, we'll look at how this tax works and why many think it unfairly favors the wealthy.
What the wage base means for Social Security taxes
The reason why many consider Social Security payroll tax withholding to be regressive is that the tax gets imposed only up to a certain amount in earnings. Known as the wage base, this amount is $137,700 for 2020.
Once your earnings for the year exceed that $137,700 amount, you'll no longer have to pay any additional Social Security payroll taxes. That means that some ultra-high-income taxpayers have already finished paying their Social Security taxes for the year, while others will be done paying in the near future.
If Your Annual Income Is This:
Then You'll Finish Paying Your Social Security Taxes on:
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Believe it or not, these figures are actually a little bit later in the year than they were in 2019. That's because the wage base tends to move up each year in line with inflation. For instance, the wage base last year was $132,900, and that resulted in $1 million earners finishing up with their Social Security taxes on Feb. 18 -- two days earlier than this year.
Arguments about Social Security payroll taxes
Needless to say, there are some politicians in Washington who aren't happy with the way the Social Security tax system treats the rich. Recently, there have been numerous proposals that would impose more Social Security payroll taxes on income above the current wage base. Most of these proposals would still leave a spot immediately above the $137,700 amount for which the government wouldn't collect any tax for Social Security, instead having payroll taxes start up again at a higher income level. For instance, one proposal would impose new Social Security taxes for wages above $250,000.
Yet there's an argument against lifting the wage base as well. Currently, the maximum amount of income on which Social Security taxes get imposed also defines the maximum amount of earnings that a worker gets credited for in determining lifetime Social Security benefits. That ensures that everyone paying into the system gets a corresponding positive boost to their future benefit as a result of their paid taxes. If you change the rules to force the rich to pay more without getting anything extra in their monthly checks, it would fundamentally change the way the system has worked for decades. Those favoring a wage base increase argue the advantages outweigh any disadvantage of that change to Social Security, but it's a bone of contention among policymakers.
Looking forward to millionaires' freedom from Social Security taxes
Current law is almost certain to continue at least through 2020 if not beyond, and that means few changes to Social Security tax laws are likely to happen. That'll leave top earners with the ability again this year to stop paying Social Security taxes for a long period, but for those making $137,700 or less, that 6.2% Social Security payroll tax will hit their paychecks from January to December.
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