Taxing the reality of the job tax – Franklin County Free Press

Federal employment taxes – specifically, Social Security and Medicare taxes – affect employees, employers, and the self-employed alike, and these taxes increase every year. As the wage cap for Social Security taxes continues to rise each year, the share of lost revenue from these labor taxes increases for both employees and employers.

How big can my Social Security tax bill be?

If you are employed, your salary is subject to a 12.4% social security tax up to the annual salary cap. Half of this tax — 6.2 percent — is automatically withheld from your paychecks, while your employer covers the other half, which you don’t see. For 2024, the Social Security wage ceiling is $168,600, up from $160,200 in 2023. That means if your earnings meet or exceed this ceiling, your Social Security tax liability will reach $20,906.

In 2025, the salary cap is expected to rise to $174,900, with future years bringing even higher caps, according to Social Security Administration (SSA) projections. These future increases are tied to inflation adjustments, meaning your tax bill will continue to rise. By 2033, the cap is projected to reach $242,700, pushing the maximum Social Security tax hit to $30,095.

Worse if you’re self-employed

If you’re self-employed—whether as a sole proprietor, partner, or LLC member—Social Security taxes are even more painful. Unlike employees who share the tax with their employer, the self-employed pay the full 12.4% themselves. For 2024, that means a maximum Social Security tax of $20,906 on net self-employment income of $168,600.

You’ll calculate this tax using Schedule SE, where your net self-employment income is multiplied by 0.9235. As the salary cap rises, so will the tax burden on the self-employed.

And then there is the Medicare tax

The Medicare tax adds another level of cost. Employees pay 1.45 percent, equal to their employer, while the self-employed are responsible for a total of 2.9 percent. When combined with Social Security tax, the total federal payroll tax on income up to the salary cap is 15.3 percent (12.4 percent for Social Security and 2.9 percent for Medicare).

For the self-employed, that means paying 15.3% of your net self-employment income, up to $168,600 for 2024. Above that cap, the Social Security tax drops, but the Medicare tax continues indefinitely.

Medicare surcharge of 0.9 percent

In addition to these taxes, the 0.9% Medicare surtax applies once your salary or net self-employment income exceeds certain thresholds. If you have both salary and self-employment income, or if your spouse also has income, your liability can be more complicated, requiring careful planning to avoid underpayments.

Pain mitigation strategies

There are strategies to reduce your Social Security tax, as outlined below. However, keep in mind that the less you pay, the lower your benefits will be. Steps to reduce your social security tax:

1. S-Corp Election: If you are self-employed, you can elect to treat your business as an S-Corporation and pay yourself a reasonable salary that will be subject to Social Security and Medicare taxes, but any additional profit distributions to you avoid payroll taxes.
2. Income shifting: If you are a business owner, you may be able to shift income to other family members in lower tax brackets, effectively reducing your overall tax liability.
3. Tax Planning: Proactively working with a tax professional to explore legal strategies and deductions can help reduce your taxable income and, subsequently, your workforce’s tax burden.

conclusion

Social Security and Medicare taxes are a significant financial liability for both employees and the self-employed, and these taxes will continue to rise. By planning ahead and implementing smart tax strategies, you can mitigate the impact on your wallet.

If you have any questions, contact Saunders Tax & Accounting at www.SaundersTax.com or call us at 301-714-2071. Open Monday to Thursday from 9:00 to 17:00. Awarded the Hagerstown Chamber of Commerce “2023 Small Business of the Year” and the 2024 Hagerstown Hot List, we’ve been offering a less burdensome life and more prosperous solutions for 40 years!