Every year, the federal government sets a limit on the number of earnings that are subject to Social Security tax. The limit changes annually with the changes in the national average wage index with a view to account for inflation in Social Security benefits. What is the Social Security tax limit for 2022?
Around 68 million people, including retirees and disabled people, receive Social Security benefits. The benefits help people in need meet their basic requirements, and are among the three major sources of retirement income for Americans. If people are still working, they have to fund benefits for existing beneficiaries.
The Social Security tax consists of two parts.
The Social Security tax, which is also known as Social Security Old-Age, Survivors, and Disability Insurance (OASDI) tax, funds the Social Security program in the U.S. The tax consists of two parts:
- Payroll tax and Self-Employment Contributions Act
- Medicare tax or Hospital Insurance (HI) tax
Payroll taxes are withheld from an employee’s wages or salaries by the employer and then forwarded to the government. In 2022, the Social Security tax rate is 6.2 percent for the employer and 6.2 percent for the employee (same since 1990). The OASDI tax rate for self-employment income is 12.4 percent in 2022. Self-employed people are responsible for covering both the employer and employee share of OASDI contributions.
These taxes are part of the taxes self-employed people pay as part of the quarterly estimated taxes to the IRS. However, the IRS allows self-employed individuals to deduct the employer portion of self-employment taxes from their taxable income.
Let's break down the Medicare tax.
Tax rates under the HI program are 1.45 percent for employees and employers each and 2.90 percent for self-employed persons. Unlike the Social Security tax, this HI tax isn't subject to a wage limit and employees will be taxed on their entire incomes. Individuals earning more than $200,000 (and a married couple filing jointly making over $250,000) have paid an additional 0.9 percent in Medicare taxes since January 2013.
The Social Security tax limit is $147,000 for 2022, up from $142,800 in 2021. Therefore, the maximum amount that can be withheld from an employee’s paycheck in 2022 is $9,114 (6.2 percent of $147,000). No income beyond the cap of $147,000 for 2022 will be liable to Social Security tax.
Who is exempt from paying Social Security tax?
While most working people end up paying Social Security tax, some people are exempted from paying Social Security tax. These include:
- Religious organizations: They must belong to a recognized religious sect that's conscientiously opposed to accepting healthcare or retirement benefits under a private plan.
- Students and young workers: Currently enrolled students who work at their university can be exempt from Social Security taxes. So are children under 18 who work for their parents in a family-owned business.
- Employees of foreign governments and nonresident aliens
- Workers in the public sector
- High-income earners: This is because part of the income for high-income earners isn't liable for Social Security tax.