How Does the Wage Cap Increase Affect Your Business?

As of January 1st, 2022, the new wage cap amount on an individual's earnings will be subject to $147,000 compared to $142,800 cap in 2021. 

What does this mean for Self-Employed, Employees, and Employers, and how does this impact your bottom line? Let's break it down one step at a time, 

What earnings are subject to Social Security Tax?

All of the below are to Social Security Tax

• Wages
• Salaries
• Bonuses
• Tips

What exactly is Social Security Tax? 

Here is a quick history lesson on Social Security Tax and, in short, what you need to know. 

• Social Security Tax is also known as Disability Insurance Tax (OASDI Tax) 
• Together Social Security Tax and Medicare make up the FICA Tax (Federal Insurance Contributions Act).
• W-2 Employees pay a tax rate of 6.2% of their earnings, and Employers match that tax rate, so the government receives a total of 12.4% via payroll deductions.
• Self-Employed individuals pay 12.4% of their wages in Social Security Tax.
• Social Security Taxes are used to fund Social Security benefits to retired individuals. 

Wage Cap on Social Security Tax Explained

The Social Security tax is regressive, meaning that a larger portion of lower-income earners' total income is withheld, compared with that of higher-income earners, as explained by Investopedia.

The wage cap or maximum is that amount subject to tax, any amount that exceeds the wage cap is NOT subject to tax. 

Wage Cap in the last three Year:

• 2022 - $147,000
• 2021 - $142,800
• 2020 - $137,700

Let's go through some scenarios to see how this works: 

Victor is a Pharmacist at All the Goodies Pharmacy, and he earns a salary of $110,000 a year. 

• $110,000 x 6.2% = $6,820 <= This is the amount that he would pay in social security taxes. 

Robin is an Interior designer and makes $145,000 a year. She will get a $12,000 bonus, making her total wages $157,000. 

• In this scenario, she will only pay social security tax on the cap the first $147,000.
• $147,000 x 6.2% = $9,114 <= This is the amount that he would pay in social security taxes. 
• The difference of $10,000 is not subject to social security tax. 

*The employer will match $6,820 and $9,114, respectively. 

Why is this happening in 2022? 

SHRM article explains in detail how the taxable wage cap is subject to an automatic adjustment each year based on increases in the national average wage index (not the inflation rate), calculated annually by the SSA. See the summarized changes posted in the SSA Fact Sheet.

In order to increase Social Security payments and keep up with inflation, the SSA requires Employees, Employers, and Self-Employed to pay more into social security. 

The monthly Social Security Benefit for Worker Retiring at Full Retirement Age in 2021 is $3,148/mo, and it will increase to $3,345/mo in 2022. 

Employers should make sure to update their payroll software to account for the increase and make sure it's calculated correctly. They should also notify employees about the new wage cap and how that will impact their net wages. 

The Impact for Employees, Employers, Self-Employed, and the Future!

Employees will see a decrease in their overall net pay. Employers will have to adjust their budgets to account for the added social security expense, which may affect pay increases, bonuses, or other benefits. 

For Self-Employed individuals, the total amount paid towards Social Security tax in 2022 will depend on your net income (Gross Income - Expenses). Still, it will for sure put a dent in your finances since you pay as both the employee and the employer. 

Because the Social Security System is going through a financial crisis, there is talk about removing the wage cap altogether. It is said that in about 15 years, it will start collecting less money than the money it needs to pay its participants. 

As described in The Heritage analysis, based on the SSA's own projections, shows that eliminating the cap on wages subject to the Social Security tax would generate only enough revenue to push back the date of the system's bankruptcy a few years. It would be the largest tax increase in U.S. history, subjecting millions of American families to a massive hike in payroll taxes. And it would harm their economic prospects by slowing economic growth and reducing their employment opportunities.

What do you think, should the wage cap be eliminated?

Should the social security % increase?

Should the social security tax be eliminated altogether?

Will your Social Security be enough?