The Social Security payroll tax limit will rise in 2025, and here's how it may impact you.

• The Social Security Administration announced a higher earnings threshold for payroll taxes on October 10th.
• In 2025, the "taxable maximum" will increase by approximately 4.4% from $168,600 in 2024 to $176,100.
• The combined tax rate for Social Security and Medicare is 15.3%, with workers contributing 6.2% and employers contributing the remaining 9.1%. Unlike Social Security, Medicare does not have a cap on earnings.

In 2025, millions of retired Americans will receive a 2.5% cost-of-living adjustment for their benefit payments, as announced by the Social Security Administration. However, a lesser-known tax change will also affect higher-income workers.

The Social Security Administration announced a higher earnings limit for payroll taxes on October 10th.

The limit shifts annually based on the national average wage index.

In 2025, the earnings limit for Social Security will be $176,100, an increase of approximately 4.4% from $168,600 in 2024. Earnings above this cap are not subject to Social Security taxes but are still subject to Medicare taxes.

The Social Security Administration has announced a 2.5% COLA for 2025. Here's the inflation breakdown for September 2024 in one chart. The reason for the smaller Social Security COLA in 2025 is explained here.

Certified financial planner Sean Lovison, founder of Philadelphia-area Purpose Built Financial Services, stated that while the change means more payroll taxes withheld for certain workers, "there's very little you can do" to avoid it.

How the Social Security tax calculation works

The payroll tax rate for Social Security is 12.4%, with workers contributing 6.2% through paycheck deductions and employers paying the remaining 6.2%.

In 2025, workers will contribute 6.2% of their earnings up to $176,100, which is the maximum amount they can pay, according to the Social Security Administration. After reaching the maximum, they will no longer contribute to the program for the rest of the year.

According to Lovison, a certified public accountant, the 2025 adjustment will have a larger impact on self-employed workers because they are responsible for paying the full 12.4% of their earnings towards Social Security.

Medicare payroll taxes are collected by the government, with workers and employers each contributing 1.45%. Unlike Social Security, there is no cap on taxable earnings for Medicare.

Medicare tax is the responsibility of self-employed workers, who must pay 15.3% of their earnings, split evenly between Social Security and Medicare. Despite not being able to claim itemized deductions, they can still deduct half of their self-employment taxes on their personal tax returns.

Concerns over Social Security solvency

The trustees' report in May revealed that the latest Social Security adjustments are being made amid growing concerns about the program's solvency, as the trust funds used to pay benefits are expected to run out in 2035.

Some advocates have proposed increasing the Social Security wage base to secure more funding.

The Social Security Administration's 2024 trustees' report presents over 150 potential solutions to address the funding shortfall, which involve reducing benefits and increasing revenue.

Alicia Munnell, director of the Center for Retirement Research at Boston College, wrote in August that the largest financial gain comes from removing the taxable maximum.

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