Certain Individuals Might Incur Higher Social Security Payroll Taxes in 2025 Due to This Alteration
There are few social programs considered fundamentally significant to American citizens as Social Security. After contributing federal wage taxes for numerous years, United States retirees are entitled to a consistent income flow throughout their golden years, an income source that the majority of them depend on to maintain financial stability.
Though many complain about paying these taxes, they are imperative to sustaining this program. Regrettably, the amount some individuals may pay in Social Security payroll taxes on their wage earnings might increment in 2025 due to one of the program's regular modifications.
Understanding payroll taxes
A standard Social Security payroll tax is imposed under the Federal Insurance Contributions Act (FICA). Employees with an employer and receive a W-2 are jointly responsible for this 12.4% tax, with each party contributing 6.2% of their wages. For instance, if an individual earns $100,000 annually, they will observe approximately $6,200 in Social Security payroll taxes deducted from their paychecks throughout the year, while their employer will remit an additional $6,200 to the government. If you're self-employed (operating as a contractor, freelancer, sole proprietor, etc.), you are responsible for managing the complete 12.4% tax fee. (Entrepreneurship indeed has its privileges.)
Social Security payroll taxes are directed towards granting benefits to individuals presently receiving Social Security. This generates a cycle where current workers finance present-day retirees, anticipating to reap the benefits when they retire.
The reason for the rise in Social Security payroll taxes in 2025
Every year, most Americans' wages and salaries are subject to Social Security payroll taxes, but only up to a specific amount: the wage base limit.
Earnings surpassing the wage base limit are untouched by Social Security payroll taxes. The government usually increases the wage base limit yearly which corresponds to the growth of the average U.S. wage.
In 2024, the wage base limit is $168,600. This indicates that any earnings beyond that amount are exempt from Social Security taxes. In 2025, the wage base limit will ascend to $176,100.
Individuals who maintain an income between $168,600 and $176,100 in 2024, but endure the same income level in 2025, will discover that an expanded portion of their income will be subject to Social Security taxes.
For instance, if someone earned $175,000 in 2024, $6,400 of their earned income would have been exempt from the Social Security payroll tax, saving them almost $400 in taxes. However, if they earn the same amount in 2025, their complete income will be subject to payroll taxes.
Exemptions from paying Social Security payroll taxes
While most workers are obligated to pay Social Security payroll taxes, there are some exemptions:
- Student workers: Full-time students, whose employment is contingent upon the student's continuous eligibility and enrollment, are exempt. This exemption is applicable only to wages paid by the educational institution where the student is enrolled – i.e., to those participating in work-study programs. It does not apply to jobs performed for an off-campus employer.
- Certain religious groups: Members of certain religious groups, such as the Amish and Mennonites, can request a Social Security tax exemption if their religious beliefs prohibit participating in governmental programs like Social Security.
- State and local government employees: Certain state and local government employees covered under public retirement plans are not bound by Social Security payroll taxes.
- Foreign government employees: Foreign scholars, teachers, professors, researchers, non-students, and similar workers temporarily present in the U.S. are exempt from Social Security payroll taxes on wages earned for services performed within the U.S.
- Self-employed individuals with low income: You are exempt if you are self-employed and earn less than $400. If your income exceeds that amount, the amount subject to self-employment tax is 92.35% of your net earnings from self-employment.
Following the increase in the wage base limit in 2025, individuals with annual earnings between $168,600 and $176,100 will no longer be exempt from Social Security payroll taxes, leading to an increased financial burden during retirement. As many retirees rely heavily on Social Security benefits for their financial stability, this change might impact their retirement income.
In light of the rise in the wage base limit, retirement savings strategies become even more important to ensure a consistent income flow during the golden years, complementing the Social Security benefits and sustaining overall financial stability.
