The Social Security Administration (SSA) just announced two key 2025 adjustments: the Social Security COLA (cost of living adjustment) and the new Social Security tax limit.
While you’ve likely heard a lot about the COLA, did you know there's a cap on the amount of income subject to Social Security payroll tax? This ceiling, known as the Social Security tax limit or "wage cap," sets the maximum earnings that can be taxed to fund the Social Security program.
Social Security provides vital retirement, disability, and survivor benefits to over 68 million qualified individuals across the United States.
Social Security wage base 2025 increase
For 2025, the SSA has set the COLA at 2.5%.
The Social Security tax limit will increase by about 4.4% in 2025.
Both of these amounts are adjusted annually for inflation. However, it’s important to note that they are calculated using distinct methods and data sets.
The tax limit changes are particularly significant for high-income earners, who may pay more Social Security tax next year. So, understanding the adjustment is crucial for effective financial planning.
Here’s more of what you need to know.
Social Security tax rate
The Social Security tax limit will rise to $176,100 in 2025. (The 2024 tax limit is $168,600.) This 4.4% increase is less than the 5.2% jump from 2023 to 2024.
Still, if you earn more than $168,600 this year, you haven’t had to pay the Social Security payroll tax on the amount of your income that exceeds that limit.) That can result in considerable tax savings.
- Take, for example, an employee with a 2024 annual salary that exceeds the tax limit by $10,000. Since the Social Security tax rate is 6.2% (your employer also pays 6.2%), they would save $620 on Social Security taxes.
- On the other hand, someone who earns wages exceeding the base by $30,000 would receive a $1,860 tax break.
- The more you make over the tax limit, the more your Social Security tax savings.
However, the Social Security tax limit increases yearly as the national average wage index increases. When that happens, more income is subject to the Social Security tax.
Note: Some people don’t have to pay Social Security taxes. (Exemptions from Social Security taxes may be available if certain requirements are met.)
Also, self-employed individuals pay the full 12.4% rate. However, if you're self-employed, you can deduct the employer-equivalent portion of that amount.
Medicare tax considerations
It’s also worth noting that, unlike Social Security, Medicare tax has no income cap. The standard Medicare tax rate of 1.45% (paid by the employee, 2.9% total when added to the employer portion) applies to all earnings, regardless of income level.
High-income earners can be subject to an additional Medicare surtax of 0.9%. This applies to those with income above $200,000 for single filers or $250,000 for married couples filing jointly.
Self-employed individuals pay the employee and employer portions of Medicare tax but can claim a self-employment tax deduction. The 0.9% on high incomes may be applicable.
Social Security COLA increase 2025
Along with the wage tax base rate, the SSA announced the 2025 COLA increase, which is 2.5%.
On average, according to the SSA, Social Security retirement monthly benefits for about 68 million people are expected to grow by more than $50 beginning January 2025.
Will the Social Security wage limit be eliminated?
You may have heard about proposals to eliminate the Social Security tax limit or wage base.
This debate primarily centers around increasing revenue for the Social Security program trust fund. But there are also concerns about fairness in the current tax approach.
- For example, by removing the wage base, high-income earners would contribute Social Security taxes on their entire earnings, potentially injecting significant additional revenue into the system.
- Proponents say this could help shore up Social Security for future generations.
Some say removing the tax limit would ensure all workers, regardless of income level, contribute the same percentage of their earnings to Social Security.
However, opponents of removing the wage base contend that increasing taxes on high earners could discourage productivity and economic growth, potentially reducing overall tax revenue.
Additionally, some point out that while high-income individuals might pay more in taxes, the current Social Security benefit calculation formula would result in them receiving higher benefits in retirement, potentially straining the system further.
2025 Social Security wage cap: Bottom line
For now, pay attention to the 2024 Social Security wage cap and, for planning, this new 2025 limit.
Also, watch tax policy taking center stage in the 2024 election. Proposals to shore up Social Security could be a key issue throughout 2025 as lawmakers address tax policy to deal with looming expirations of several key Tax Cuts and Jobs Act (TCJA) provisions.
