In 2025, millions of retired Americans will see a 2.5% cost-of-living adjustment for benefit payments, according to the Social Security Administration. But a lesser-known tax change will also impact higher-income workers.
The Social Security Administration on Oct. 10 unveiled a higher threshold for earnings subject to Social Security payroll taxes, known as the “taxable maximum” or “wage base.”
The limit shifts annually based on the national average wage index.
The limit for 2025 will be $176,100, up about 4.4% from $168,600 in 2024. Earnings above those caps aren’t subject to Social Security taxes but still incur levies for Medicare.
The change means more payroll taxes withheld for certain workers, but “there’s very little you can do” to avoid it, said certified financial planner Sean Lovison, founder of Philadelphia-area Purpose Built Financial Services.
How the Social Security tax calculation works
The Social Security payroll tax rate is 12.4%, with workers paying 6.2% through paycheck deductions. Employers pay the other 6.2%.
For 2025, workers will pay 6.2% on earnings up to $176,100, for a maximum of $10,918.20, according to the Social Security Administration. Once workers reach that max, they don’t pay into the program for the rest of the year.
The 2025 adjustment has a bigger impact on self-employed workers because “they’re paying both sides of it,” meaning they owe the full 12.4%, according to Lovison, who is also a certified public accountant.
The government also collects 2.9% in Medicare payroll taxes, with workers and employers each paying 1.45%. But there is no cap on taxable earnings for Medicare.
Self-employed workers are also responsible for both sides of the Medicare tax, for a combined 15.3% between Social Security and Medicare. However, they can deduct 50% of self-employment taxes on their individual return, even if they don’t itemize.
Concerns over Social Security solvency
The latest Social Security adjustments come amid growing concerns about the program’s solvency. The trust funds used to pay benefits are expected to run out in 2035, the trustees’ report showed in May.
In the meantime, some advocates have pushed to increase the Social Security wage base to provide more funding.
The Social Security Administration’s 2024 trustees’ report details more than 150 options to close the funding gap, including ways to cut benefits and boost revenue.
“Clearly, the biggest financial gain comes from eliminating the taxable maximum,” Alicia Munnell, director of the Center for Retirement Research at Boston College wrote about the report in August.
However, future changes are unclear with control over Congress and the White House uncertain.