Upcoming Changes to Social Security in 2025: What You Need to Know

Starting in January, Social Security beneficiaries will see a 2.5% cost-of-living adjustment (COLA), increasing the average monthly payment from $1,927 to $1,976. However, changes coming in 2025 will also affect workers, possibly leading to a higher tax burden. Here’s what to expect.

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Increased Social Security Payroll Tax Threshold

Not everyone realizes that Social Security payroll tax is only charged on a portion of their earnings. In 2024, this tax applies only to the first $168,600 of income. Many individuals hit this limit, contributing tax on all of their earnings. However, high earners who exceed this amount do not pay Social Security tax on the excess income, even though they still owe income tax. Income above this ceiling does not contribute to future Social Security benefits either.

The Social Security Administration adjusts this annual income ceiling. In 2025, it will rise to $176,100, meaning some high earners could see an increase in taxed earnings amounting to $7,500. It is essential to clarify that this does not equate to a $7,500 increase in taxes.

Tax Impacts for High Earners

The payroll tax rate for Social Security sits at 12.4%, shared evenly between employee and employer. For traditional employees, an additional $7,500 in income translates to $465 more in Social Security tax ($7,500 x 6.2%).

Self-employed individuals bear the full 12.4% tax burden but can deduct half of their self-employment taxes on their income tax return. In this case, a higher ceiling translates to an extra $930 in costs for them. This additional amount may seem minor to many high earners, but those with tighter budgets should consider this increase in taxes when planning for 2025.

For individuals earning between the current limit of $168,600 and the new limit of $176,100, they can calculate their additional tax owed by subtracting their income from $168,600 and multiplying the result by either 6.2% or 12.4%. For instance, a salary of $170,000 results in $1,400 over the current limit, increasing the tax bill by approximately $87 if employed traditionally.

Stable Tax Obligations for Lower Earners

Those earning less than $168,600 will experience little change in their tax obligations. They will continue paying Social Security payroll taxes on all their earnings, which also contribute to their future benefits. If they receive a raise, they may pay slightly more in taxes, but the increase in income will likely overshadow the deducted taxes.

Secret Social Security Bonuses for Retirees

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