Due to a significant cost of living increase announced by the Social Security Administration (SSA), retirees and other recipients can expect to receive more benefits in 2022. This increase also means workers – especially high income earners – and employers can expect higher payroll taxes.
In October 2021, the SSA announced a 5.9% cost of living increase (COLA), one of the most significant increases in decades. The announcement also increased amount of income subject to payroll taxes. The maximum earnings subject to Federal Insurance Contributions Act (FICA) tax, also referred to as the wage base, increased from $142,800 in 2021 to $147,000 in 2022. Both salaried and self-employed workers will be responsible for contributing additional funds to eventually pay for Social Security benefits.
As a result of the increased wage base, higher earners will have more income subject to payroll withholding.
Workers and their employers pay a combined rate of 15.3% in FICA taxes. Of that 15.3%, Social Security accounts for 12.4% and Medicare is 2.9%. For salaried (not self-employed) workers, employers pay 6.2% of Social Security and 1.45% of Medicare each pay period. Based on the new wage base, high earners who meet the new wage base will have an additional $260.40 of social security taxes deducted from payroll annually. Self-employed taxpayers who make at least $147,000 can expect to pay the full amount of FICA taxes.
Income above the annual wage base is not subject to Social Security payroll taxes, but there is no income cap for Medicare taxes. All wages are subject to the 2.9% combined tax for Medicare purposes. Additionally, taxpayers who earn more than $200,000 (single) or $250,000 (married, filing jointly) are liable for an additional 0.9% Medicare tax under the Affordable Care Act (ACA). The ACA tax is not matched by employers, but if you are subject to this tax you may choose to have your employer withhold the amount from your paychecks or you can make estimated quarterly payments to the IRS.
If you have questions about payroll taxes or other tax issues, contact HFM today. Our tax professionals are well versed on the latest guidance to provide our clients with professional, personalized services.