On October 13, 2022, the Social Security Administration announced a couple of important adjustments. Both social security benefits and the amount of earnings subject to the Social Security payroll tax are automatically adjusted every year to account for the cost of living. Thanks to high levels of inflation, however, this year’s increases are unusually high.
More Money for Retirees…
Good news for those collecting Social Security and Supplemental Security Insurance (SSI): starting in January, benefits will increase by 8.7%. That means that approximately 70 million Americans will see their benefits rise by an average of around $140 dollar a month.
Since 1975, increases in social security benefits have been based on cost-of-living adjustments, or COLAs (prior to that time, increases were set by legislation). Cost-of-living adjustments are based on the increase in the Consumer Price Index (CPI-W) from the third quarter of 2021 through the third quarter of 2022.
The new COLA is the biggest percentage increase since 1981.
…More Taxes for Some Workers
The flipside to the increase in benefits is an increase in the wage cap on earnings subject to Social Security payroll tax. As of January, the maximum taxable earnings amount will increase by 8.7%, from $147,000 to $160,200.
That means that employees and employers alike will pay an old age, survivors, and disability insurance (OSADI) tax of 6.2% on income up to $160,200. Self-employed business owners, who are required to pay both employee and employer tax, will be subject to a 12.4% OSADI tax on income up to $160,200.
Employers should adjust their payroll systems accordingly and notify affected employees before the beginning of the new year.
Medicare Tax Rates Stay the Same
There is no wage limit on the Medicare hospital insurance tax, and it does not adjust for inflation. Employers and employees currently pay 1.45% each and self-employed people pay 2.9%, which remains unchanged for 2023.
Likewise, there is no change for highly compensated taxpayers who pay an additional Medicare tax of 0.9%. That amount is levied on income that exceeds the following thresholds, which are not adjusted for inflation:
- $200,000 for taxpayers filing singly
- $250,000 for married taxpayers filing jointly
- $125,000 for married taxpayers filing separately
If These Changes Affect You, Good Tax Planning Can Help
Those earning more than $147,000 a year can expect to pay more in social security taxes in 2023. Self-employed people earning that amount or more will be particularly affected. Additionally, more people will be affected by the additional 0.9% Medicare tax because the thresholds are not adjusted for inflation.
If you’d like to discuss ways that tax planning may help you save money in the new year, contact Tonneson + Co. to discuss your options.