Why Millionaires Don’t Have to Pay Any More Social Security Taxes This Year
As of this week, Americans earning $1,000,000 have already finished paying their share of Social Security taxes for the year, according to a new report. Any future paychecks for those million-dollar earners in 2023 won’t see deductions for Social Security.
By contrast, the vast majority of employees must contribute to the social safety net program throughout the entire year. This scenario is due to a lesser-known provision called the Social Security tax cap.
What the research says
A new analysis of the Social Security tax cap by the left-leaning Center for Economic and Policy Research highlights the fact that those who earn $1,000,000 salaries stopped paying Social Security payroll taxes on Feb. 28 this year.
The Social Security tax cap currently shields any income over $160,200 from the 6.2% payroll tax that is deducted from employees’ paychecks. The tax cap provision has been a feature of the Social Security program since its inception. The cap changes each year. In 1937, shortly after Social Security was created, the cap was $3,000. Last year, it was $147,000 — and today, it is $160,200.
Once $160,200 has been earned for 2023, the employee no longer has Social Security taxes deducted from their paycheck. On Feb. 28, millionaire earners reached that limit.
The CEPR estimates that some 94% of employees will earn under $160,200 in 2023, so Social Security payroll taxes will be deducted throughout the entire year for the vast majority of workers in America.
In other words, given the 2023 cap, the maximum amount of taxes an American can pay into Social Security is $9,932.40 for the year. Because the tax is deducted from employee paychecks — and because millionaires’ paychecks are much larger — they reach this limit much sooner than typical employees.
For example, an employee earning $950,000 reached their limit on Friday. And anyone making $500,000 a year will stop being taxed on April 27, according to CEPR’s tax-cap calculator.
Those who earn above $160,200 still have to pay some payroll taxes on all of their income, however — 1.45% for Medicare taxes, which does not have an income cap. And of course, their earnings are still subject to federal income taxes and state taxes, where applicable.
More than 66 million Americans rely on Social Security benefits each month.
Benefits are paid primarily to retirees, though the program also assists nearly 9 million people with disabilities and more than 3 million children.
The program is funded by employee payroll taxes — 6.2% for workers and 6.2% for employers. All income above $160,200 in 2023 is exempt.
Recent calculations from the nonpartisan Congressional Budget Office projected that Social Security tax coffers will run out of money by 2033 if Congress does not intervene.
When the funds are exhausted, benefits will still be paid out, though monthly checks would be slashed by about 25%, according to the CBO.
An increasingly popular solution to Social Security’s looming financial crisis is to raise or eliminate the tax cap.
The CBO recently estimated that if the tax cap were to be lifted to $250,000, it would push back Social Security’s insolvency date to 2046.
Some lawmakers want to eliminate the tax cap altogether. Last month, progressive Sens. Bernie Sanders, I-Vt., and Elizabeth Warren, D-Mass., introduced the “Social Security Expansion Act” to get rid of the tax cap. Doing so, they say, will fully fund the program — including increased benefits — for the next 75 years.
Retire with Money
Retire With Money brings the latest retirement news, insights, and advice to your inbox. Jill Cornfield has covered retirement for more than 10 years.
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