Social Security taxes are paid by both employees and employers on income up to an annual cap, commonly referred to as maximum taxable earnings. Based on changes in the annual National Average Wage Index, every year, the federal government raises the Social Security threshold to keep up with inflation. In this blog, we will discuss some recent changes to IRS payroll taxes.
Changes in Social Security Payroll Taxes in 2022
The maximum earnings subject to the Social Security payroll tax increased to $147,000 on January 1, 2022, up from $142,800 for 2021, a $4,200 increase. Over the last five years, the Social Security pay cap has increased by more than 15.5 percent, rising from $127,200 in 2017 to $147,000 in 2022. However, the $4,200 rise for 2022 is less than the $5,100 increase for 2021, which is an increase from the $137,700 limit for 2020, as a result of restrictions on salary increases during the peak of the COVID-19 pandemic. The maximum amount of Social Security tax that can be deducted from an employee’s salary in 2022 is $9,114 ($147,000 x 6.2%). Additionally, Social Security recipients will receive a marginally larger benefit amount. Compared to the 1.3% increase for 2021, the cost-of-living adjustment (COLA) for 2022 was increased in October 2021 by 5.9%.
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What you should know about FICA rates
The Federal Insurance Contributions Act (FICA) tax covers both Social Security and Medicare payroll taxes. FICA tax rates are predetermined by statute and may only be altered by a new tax law. A 12.4 percent payroll tax, of which 6.2 percent is contributed by employees and the remaining 6.5 percent by employers, is levied on wages up to the taxable earnings ceiling to fund Social Security. Self–employed individuals pay the full 12.4 percent. The combined Social Security and Medicare payroll withholding rate for employers and employees is 7.65 percent, with only the Social Security portion being limited to the taxable maximum amount. The Medicare payroll tax rate is 1.45 percent on all earnings for employers and employees. Again, self-employed workers have to pay the full 2.9 percent, given that they are not operating under any direct employer.
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FICA Rate (Social Security + Medicare Withholding)
Below is a list of the FICA rates for employees, employers, and self-employed professionals:
- Employee: 7.65% (6.2% + 1.45%)
- Employer: 7.65% (6.2% + 1.45%)
- Self-Employed: 15.3% (12.4% + 2.9%)
It should be noted that the IRS payroll tax rates mentioned above do not include an additional 0.9 percent in Medicare taxes paid by highly compensated employees on earnings that exceed the following threshold amounts:
- $250,000 for married taxpayers who file jointly
- $125,000 for married taxpayers who file separately
- $200,000 for single and all other taxpayers
Who Is not required to pay Social Security IRS Payroll Tax?
Some people can be eligible for exemptions from the Social Security tax requirement:
- A “religious exemption” may be requested by religious organizations.
- Depending on the type of visa non-resident aliens have, they may seek an exemption.
- Students working at their university may be exempt.
- Under certain conditions, employees of a foreign government may be exempted.
The best way to figure out if you are eligible for an exemption is to consult a Dallas payroll tax attorney.
Every year, the IRS payroll tax keeps changing, making it sometimes difficult for employers and self-employed people to keep track of their taxes. When facing IRS tax problems, it always helps to consult an experienced IRS attorney. If you are in Dallas, the Law Offices of Nick Nemeth can help. For answers to all your questions about payroll tax in Dallas, simply call (972) 426-2553. You may also fill out our Contact Form, and we would reach out to you at the earliest.