Social Security changes typically occur every year. One of the most anticipated changes is the annual cost-of-living adjustment (COLA), which determines how much Social Security benefits will increase the following year. However, another change can affect a much larger portion of the population than retirees.
I am, of course, referring to the payroll taxes workers have withheld from their paychecks to fund the Social Security program. People pay into the program while they work and reap the benefits when they retire. A fairly significant change is coming to the earnings subject to Social Security taxes. High-income earners could be taxed on thousands of dollars of additional income in 2025.
How Social Security payroll taxes work
Payroll taxes fund much of the Social Security program. Employers and employees each pay a 6.2% tax on eligible earnings, while self-employed workers must cover the full 12.4% themselves. In 2023, payroll taxes surpassed $1.2 trillion and covered 91.3% of Social Security's revenue.
Unfortunately, one reason the Social Security program is having financial issues is because an aging population has boosted benefit outlays even as slowing growth in the U.S. workforce hasn't produced enough revenue growth to keep up. That's forcing the program to dip into Social Security's reserve funds, which are projected to be depleted by 2035.
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The wage cap
Social Security taxes apply only up to a fixed limit, called the contribution or benefit base. Some people refer to it as the wage cap. The cap was $168,600 in 2024. That means that even if you have an annual salary of $2 million, the 6.2% Social Security tax would only apply to the first $168,600 of that amount.
However, each year, the wage cap typically increases. The Social Security Administration (SSA) calculates the new wage cap by looking at annual changes in the national average wage index, which looks at national average wage data. In 2025, the wage cap will increase to $176,100. That means high-income earners may have to pay Social Security taxes on an additional $7,500.
This does not mean you'll pay an additional $7,500 in taxes. It means the 6.2% or 12.4% tax rate would apply to the additional $7,500 of earnings, which equates to $465 in Social Security taxes, or $930 if you are self-employed.
It could also affect your future Social Security benefits
A higher wage cap doesn't just affect the taxes people will pay. It could also affect the amount of benefits you are entitled to from Social Security once you retire. That's because the SSA determines your benefits based on three main factors:
- How many years you work
- How much money you earn throughout your career
- When you claim benefits
The more money you earn during your career, the more Social Security taxes you pay, and therefore the more benefits you'd be entitled to. For instance, if you want the maximum monthly Social Security benefit of $5,108 per month, you have to earn the wage cap every year -- and there are no exceptions. That means if you make $168,600 this year, you'll need to get a $7,500 raise next year to have a shot at maximum benefits.
This is an extreme example. Most consider the maximum Social Security benefit a fantasy because of how much money you'd need to make for a long time, and having to keep up with the annual increases. However, the closer you make to the wage cap, the higher your benefits will be, which is why the increase could negatively affect your future benefits.
Ultimately, people only have so much control over their earnings, but they have more control over how long they work and when they can claim benefits. If you work at least 35 years and can delay claiming benefits for as long as possible, that will go a long way to helping you achieve higher benefits.
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