Attention, High Earners: Your Social Security Taxes Are Going Up in 2018

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The Social Security payroll tax in the United States is set at a 6.2% rate for employers and their employees, and it hasn't changed in years. However, the tax applies only to a certain maximum amount of wages each year. For 2018, the maximum for taxable Social Security wages is increasing by $1,500, which translates to more Social Security taxes for high-income individuals. Here's the new high for Social Security maximum taxable earnings, and what it could mean for your tax bill.

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The Social Security wage cap for 2018

Each year, the Social Security Administration (SSA) determines the maximum taxable earnings for Social Security purposes. In other words, the 6.2% Social Security tax rate is applied to all earned income up to that amount, but not to any income in excess of this threshold. The taxable maximum is also commonly referred to as the annual "wage cap."

Only earned income is taxed for Social Security purposes. Earned income includes salaries, wages, bonuses, and income from a business you actively participate in, to name the most common sources. Passive sources of income, such as dividends, interest income, and income from a business that you don't actively participate in, are not subject to Social Security tax.

For 2018, the SSA has announced that the wage cap will be increasing to $128,700 from the 2017 maximum of $127,200. This means that for high-income individuals, as much as $1,500 more of their earned income could be subject to Social Security taxes.

It's also worth mentioning that the term "payroll tax" collectively refers to Social Security and Medicare taxes. The overall payroll tax rate is 7.65% each on employers and employees, and the 1.45% of this amount that represents the Medicare portion of the tax is applied to all earned income. In other words, the annual wage cap applies only to the Social Security portion of the tax.

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Finally, if you're self-employed, you are responsible for paying both portions of the tax -- employer and employee. That makes your overall payroll tax rate 15.3%, and the Social Security portion is 12.4%, assessed on earned income up to the annual wage cap.

What it could mean for you

In a nutshell, if your earned income is higher than $127,200 in 2018, you'll end up paying more Social Security tax.

Workers who earn at least the new wage cap of $128,700 will get hit the hardest. The $1,500 increase in the taxable maximum means that higher-income Americans will face an increase of $93 in their Social Security tax bills. Self-employed individuals pay both the employer and employee portions of the tax and therefore could see their Social Security tax bills increase by as much as $186 for 2018.

You'll get a higher benefit, but it probably won't offset the higher taxes

If the increase in the Social Security wage cap results in a higher tax bill for you, there is one silver lining. Your eventual Social Security benefits are determined by an average of your 35 highest years of earnings, up to the wage cap, so if you earn more in 2018 than the 2017 wage cap of $127,200, your lifetime average will be higher as a result.

Because the Social Security benefit calculation formula is weighted in favor of lower-income retirees, your eventual benefit increase is unlikely to completely offset the higher tax bill, but a higher Social Security benefit can certainly make a higher tax bill seem more palatable.

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