Social Security Tax Increases Outweigh Benefits

The Social Security Administration (SSA) recently released key numbers that show an increase in the Social Security Tax. Workers will see a significant increase in their taxable wage bases in 2021. Meanwhile, retirees will see a small increase in benefits.Increases in the Effective Social Security Tax that You will be Paying in 2021The maximum earnings amount subjected to Social Security tax is going to rise from $137,700 this year, to $142,800 in 2021, an increase of 3.7%. For around 12 million workers who earn higher than the average, this adds up to a much larger tax bill.The FICA Tax Rate for Employers for 2021There are two taxes imposed by the FICA on employees, employers, and the self-employed. One is Old Age, Survivors, and Disability Insurance (OASDI) or Social Security tax (SST). The other is Hospital Insurance (HI), better known as Medicare tax. For employers, the Federal Insurance Contributions Act (FICA) tax rate for 2021 will be 7.65%. FICA apportions this as follows: 1.45% for Medicare (HI) and 6.2% for OASDI (SST). This means that in 2021, employees will pay:

• 6.2% SST on the first $142,800 of their wages;
• 1.45% Medicare (HI) tax on the first $200,000 of their wages. For married taxpayers who file jointly, the figure will be $250,000. Married taxpayers who file separately will pay 1.45% of the first $125,000 of their wages; and
• Medicare tax of 2.35% on all their wages over $200,000. The standard Medicare tax of 1.45%, plus an extra 0.9% Medicare tax, make up this tax. In the case of joint returns, the figure will be $250,000. For married taxpayers who file separate returns, the figure will be $125,000.

Self-Employment Tax Rates for 2021For the self-employed, the self-employment tax rate for 2021 will be:

• 12.4% SST on the first $142,800 of their self-employment income;
• Medicare tax of 2.90% on the first $200,000 of their self-employment income. For joint returns, the figure will be $250,000. For married couples filing separate returns, the figure will be $125,000; and
• 3.8% made up of 2.90% standard HI tax plus 0.9% extra HI tax on all their self-employed income over $200,000. For joint returns, the figure will be $250,000. For married couples who file separate tax returns, the figure will be $125,000.

The Cost of Living Allowance and Its Impact on RetireesMore than 64 million retirees will receive a COLA (cost of living) boost of 1.3% next year. This compares with a cost of living allowance of 1.6% in 2020. As a result, the average amount of Social Security benefits single retirees will receive will increase by $20 per month, resulting in a total of $1,543 next year. Meanwhile, retired couples will see their average monthly benefits reach $2,596, an increase of $33 per month. For more information about this article, please contact our tax professionals at [email protected] or toll free at 844.4WINDES (844.494.6337).