Posted by Abundant Wealth Planning LLC

Wage Cap for 2021 Rises for Social Security Payroll Taxes

Wage Cap for 2021 Rises for Social Security Payroll Taxes

From the beginning of 2021, the highest earnings that will apply to the SS (Social security) payroll tax will rise from 137,700 to 142,800 dollars

According to the increase in the national average wage index, the cap on the taxable wage is bound by the automatic cost of living adjustment every year. It is calculated every year by the Social Security Administration.

Type of Payroll Tax

2021 Maximum Earnings

2020 Maximum Earnings

Social Security

$142,800

$137,700

Medicare

No limit

No limit

Source of Data: SSA Social Security Administration 

Rates for FICA

The (FICA) Federal Insurance Contributions Act taxes involve Medicare payroll taxes and Social Security tax. While new FICA tax rates are set statutorily, only the recent tax law can change it. 

Social security financing comes via a 12.4% payroll tax exerted on wages, which reaches the taxable earnings maximum. Half of this is paid by the employee, while the second half comes from the employer. Self-employed people will foot the entire bill.

For workers and their employers, the payroll tax rate for Medicare amounts to 1.45% on the total earnings. (Again, self-employed people will pay the whole 2.9%). This makes the entire Medicare and Social Security payroll rate for both workers and their employers 7.65%.


FICA Rate (Combining Social Security and Medicare withholding)

Worker

6.2% and 1.45% gives 7.65% 

Employer

6.2% and 1.45% gives 7.65% 

Self-Employed 

12.4% and 2.9% gives 15.3% 


For wage earners that are employed, they have 6.2% as social security earnings for the maximum that can be taxed. The Medicare part is 1.45% of their earnings.

For the payroll taxes indicated above, the extra 0.9% in Medicare taxes does not apply. These are taxes paid by extremely compensated workers on their income that is more than their filing category threshold value.

  • Married taxpayers filing jointly has $250,000

  • Married people with separate filing has $125,000

  • Single and other taxpayers have 200,000 dollars

More employees are affected by the wage thresholds every year since it is not adjusted for inflation. It is vital for employers to withhold the extra Medicare tax on earnings above $200,000 in a calendar year.


Systems Will Be Adjusted to Notify Employees 

Employees with compensations above the earnings cap for 2020 maximums could have a little reduction. This applies to their take home pay that will start the coming January because of the adjustment in payroll taxes.

At the coming year, workers in the U.S. should:

  • Tweak their systems of payroll to take care of higher taxable wages for the payroll tax for Social Security.

  • Inform affected workers that a handful of their earnings will go to withholding of payroll.


COLA Test for Social Security Earnings

As early as age 62, workers can collect their benefits of retirement from Social Security. However, the effect of this is reduced monthly payment; lower than what they will have if they waited until they reach their ideal retirement age of 66.

Also, people who collect their SS benefit before the ideal retirement age but still earn income will be subjected to lower monthly benefits lower if their income is more than an annual test limit for adjusted earnings

  • For people that will collect their benefit in the year 2021 before the ripe retirement age, there will be a $1 monthly deduction from their services. This applies to every $2 earned for more than $18,960 in a year above the $18240 per year for 2020.

  • For people that will get to their ripe retirement age in the year 2021, there will be a $1 monthly deduction for every $3 earned above $50,520 for every year. This will continue until the employee gets to the ideal retirement age - $448,600 per year for 2020.

This earning has no limits for workers at their ripe retirement age or above it for the year.

Income Tax brackets for 2021

There were some tax bracket adjustments for the year 2021, according to the Internal Revenue Service in Procedure 2020-45. Details of the adjustment here.

The level of income that applies to a higher tax bracket can affect some decisions the worker makes. For instance, the amount of their income to direct to their traditional 401(k) plan or an HSA. This reduces the taxable income for the year by the amount that was donated. It also affects their decision to be involved in a nonqualified deferred income plan, provided this option exists from the employer.

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