The Social Security Tax Ceiling

Update: The social security tax ceiling for 2008 is $102, 000.

This little nugget of information is potentially useful for pretty much anyone earning a wage, but it’s especially important for those of us that are earning self-employment income. In case you weren’t aware, everytime you pay Social Security or Medicare taxes at your regular job (assuming you have one), your employer pays an equal amount on your behalf. But if you’re self-employed, you get to pay both shares yourself. And were not talking about a trivial amount of money, either. Social Security taxes currently stand at 6.2%, with Medicare adding another 1.45%. So self-employment income is subject to a 15.3% hit in addition to plain old income taxes. It’s not pretty.

But here’s the good news… If you make enough money, the Social Security part of that equation goes away. That’s right, in 2006 your Social Security taxes are capped such that you only pay on your first $94, 200 of income (it was $90, 000 in 2005, and climbs to $97, 500 in 2007). In my case, I’ll clear the bar based on my day job, which means that I’ll be able to avoid the the vast majority of self-employment tax on my other earnings. The reason that I won’t be able to avoid it entirely is that there’s no ceiling on the Medicare portion. Thus, I’ll still have to pay 2.9% (1.45% x 2) in addition to the plain old income taxes that I’ll owe.

Here’s another tip… If you worked more than one job during the year (as I did) it’s possible that you’ve overpaid your Social Security taxes… So when you get your W-2 forms, add up the values in Box 4 on each. If the total exceeds $5, 840.40 (6.2% of $94, 200) then you’re due a refund. The only catch is that you have to file IRS From 1040 (not 1040A or 1040EZ) to claim the overpayment.

And if you’re not currently in a position to benefit from this tax break, keep it in mind as you work your way up the payscale — it’s definitely something to shoot for.

Hat tip to FMF of FreeMoneyFinance for pointing out this ceiling to me the other day in an e-mail exchange about taxes.

12 Responses to “The Social Security Tax Ceiling”

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  2. Anonymous

    I have a suggestion for fixing Social Security instead of doing away with it. Why have a ceiling on tax payments. Since we are supposed to run out of money, why not lift the ceiling completely and save social security by putting more money into it for all generations. It doesn’t seem right to cut payments to partcipates when we can save it for future generations. Pay for it by no ceilings. Those making more money are not going to miss it, and a lot of people didn’t even know there was a ceiling. They will now by this article but they will not miss it if they ever reach a so called ceiling and they will know by paying more in we all will get it.

  3. Anonymous

    I am a 59 year old man that is disabled by blindness and arthritis in my spine, and most of my body. What I want to know if people like myself getting a tax break this year and if so how much and when can we expect it.
    Yours Gratefully,
    Anthony G. Alvarez

  4. Anonymous

    Hello, is there anyone know that how I get the refund for the overpayment for the social security tax (6.2% as employer and 6.2% as employee) from the self-employed income.

    My CPA said that I could only get refund for the social security tax (6.2%) as employee when I fill in 1040 form.

    There is no tax form for employer to claim the overpayment for the social security tax and medical tax, is that right?

    Thank you very much!


  5. The reason that people refer to it as being paid on your behalf is that, if you are self-employed, you would have to pay the full amount (employee + employer shares) all by your lonesome. So yes, the employer is picking up an amount that would otherwise be paid by you if you were self-employed.

  6. Anonymous

    “The employer pays…on your behalf” — sure, it’s considered a ‘normal’ part of having employees, but this is a part of the money that’s theoretically “available” to the retiree individually. Of course, I have a hard time believing any of this money, the withheld or the ‘match’ will be around when I’m ready to retire.

    I expect the ceiling to go up, the age for “retirement” to go up, and the benefit to go down. So I’d say the money isn’t available to the employer, and isn’t available to be salary either.

  7. Anonymous

    “your employer pays an equal amount on your behalf”

    I know this is the common phraseology, but it’s a complete fabrication/myth that the employer pays anything on behalf of the worker. It’s a cost of employment just like salary and if it weren’t being paid to the government, it would be available to be paid as salary.

    Nothing infuriates me more than these type of shenanigans with accounting and semantics designed to fool the average citizen. And everyone goes along with it…Arrrgggh!!!

  8. Anonymous

    If you’re self-employed, you can sometimes avoid some of the SE tax by incorporating as an “S” Corp. There are costs to incorporating, so you usually want to be making at least $30k (depending on the state) as a sole-prop or partnership or llc member.

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