2024 Social Security Tax Limit

The federal government sets a limit on how much of your income is subject to the Social Security tax. For 2024, the Social Security tax limit is $168,600 (up from $160,200 in 2023). The maximum amount of Social Security tax an employee will have withheld from their paycheck in 2024 will be $10,453.20 ($168,600 x 6.2%). This is up from $9,932.40 ($160,200 x 6.2%) in 2023.

How the Social Security Tax Works

According to the Social Security Administration (SSA), an average of 70.6 million people per month received Social Security benefits, on average, of $1,681 per month in 2022. Benefit recipients received a slightly larger amount of $1,848 in 2023 due to the cost-of-living adjustment. The estimated amount for 2024 is $1,907 per month.

These payments are funded by the Social Security tax, which is also known as the Old Age, Survivors, and Disability Insurance (OASDI).

The tax has two parts:

• The first is the payroll tax mandated by the Federal Insurance Contributions Act (FICA) and the self-employment tax mandated by the Self-Employment Contributions Act (SECA)
• Medicare tax, or hospital insurance tax, makes up the second part
  

Payroll taxes are based on an employee’s gross wages, salaries, and tips. These taxes are typically withheld by an employer and forwarded to the government on the employee’s behalf. Currently, the Social Security tax rate is 6.2% for the employer and 6.2% for the employee.

Medicare taxes are split between the employer and the employee, with a total tax rate of 2.9% for the current tax year.

Self-Employment

If you are self-employed, you pay Social Security taxes as part of the quarterly estimated taxes you submit to the Internal Revenue Service (IRS). In this case, as you are considered both the employee and the employer, you are responsible for paying the full 12.4%; however, the IRS allows self-employed individuals to deduct the employer portion of self-employment taxes from their taxable income.

The Social Security taxes you pay while you work are used to fund benefits for existing beneficiaries. Ideally, once you become eligible, current workers will pay into the program so that you can collect benefits. The longer you wait to retire, the more benefits you should receive.

Keep in mind that the Social Security program is facing long-term financing shortfalls that could affect future benefits. Increasing the annual Social Security wage cap is one way to limit the shortfall, but it would not completely solve the problem.

Social Security Tax Limits

The government bases the annual Social Security tax limits on changes in the National Wage Index (NAWI), which tends to increase every year. The changes are intended to keep Social Security benefits on track with current inflation.

Any income you earn beyond the wage cap amount is not subject to a 6.2% Social Security payroll tax. For example, an employee who earns $170,000 in 2023 will pay $9,932.40 in Social Security taxes ($160,200 x 6.2%). For 2024, they will pay $10,453.20 ($168,600 x 6.2%).

Keep in mind, however, that there is no wage base limit for Medicare tax. While the employee is only subject to Social Security tax on the first $160,200 in 2023 ($168,600 in 2024), they will have to pay 1.45% Medicare tax on the entire $170,000. Individuals who earn more than $200,000 are also subject to a 0.9% additional Medicare tax.

The combination of the increase in the Social Security tax limit and the additional Medicare tax for high-earners could result in lower take-home pay. Unfortunately, that means workers who earned over $200,000 in 2023 are at risk of owing more taxes in 2024.

Here is an example of how the Social Security limit works:

History of Social Security Tax Limits

The Social Security tax rate rarely changes, as employees have been paying 6.2% since 1990; however, unlike the tax rate, the Social Security tax limit is adjusted annually.

The federal government increased the Social Security tax limit in eight out of the past 10 years. The largest increase was in 2023 when it was raised almost 9% from $147,000 in 2022 to $160,200 in 2023.

Cost-of-Living Adjustment (COLA)

The COLA is an annual adjustment made to the Social Security benefit amount. It is measured by the Department of Labor’s Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Congress implemented annual COLA adjustments starting in 1975 when inflation rates were extremely high.

The COLA was 8.7% for 2023 and is 3.2% for 2024. This means that Social Security recipients will see an increase in their monthly Social Security payments in 2024. Individuals will receive an average of $1,907 in their SSA benefits, and couples will receive, on average, $3,033 in 2024, thanks to the COLA increase.

Retirement Earnings Test Exempt Amounts

Workers who receive benefits before they reach full retirement age (FRA) are subject to the retirement earnings test. If your income exceeds certain thresholds, then Social Security will withhold benefits until you reach FRA. Like the Social Security tax limit, these thresholds typically increase annually with the national wage index.

There are two annual earnings test exemption amounts. The first applies to individuals younger than retirement age and the other applies to individuals who reach FRA during that year. For younger recipients, Social Security withholds $1 for every $2 in excess of their exempt amount. Individuals who reach retirement age will have $1 withheld for every $3 in excess of their exempt amount.

In 2023, the earnings test exemption amounts are:

• $21,240 for individuals younger than the FRA
• $56,520 for those who reach their FRA

In other words, an individual who earns $21,240 ($56,520) or less in 2023 may be eligible to receive full Social Security benefits.

In 2024, the earnings test exemption amounts will increase to:

• $22,320 for individuals younger than the FRA
• $59,520 for those who reach their FRA
  

The Bottom Line

Social Security is a significant benefit that helps millions of retirees, disabled individuals, and surviving spouses. The Social Security Administration adjusts benefits each year to keep up with inflation, which often means a bigger payment for recipients.

However, the annual increases may not be sufficient to sustain the program in future years. It isn't wise to rely on Social Security to be your only source of income in retirement if you can save more. Many tax-advantaged savings accounts are available to build an additional nest egg.

Correction—Nov. 30, 2022: A previous version of this article wrongly stated that payroll taxes are based on an employee’s net pay when they are actually based on gross pay.