This article has been updated.
Starting Jan. 1, 2023, the maximum earnings subject to the Social Security payroll tax will increase by nearly 9 percent to $160,200—up from the $147,000 maximum for 2022, the Social Security Administration (SSA) announced Oct. 13. The SSA also posted a fact sheet summarizing the 2023 cost-of-living adjustments (COLAs).
The taxable wage cap is subject to an automatic adjustment each year based on increases in the national average wage index (not the inflation rate), calculated annually by the SSA. However, wage increases this year outpaced previous years due, in part, to the surge in inflation. On Oct. 13, the IRS announced that through September the year-over-year increase in the consumer price index was 8.2 percent, down from the 9.1-percent high notched for the annual period ending in June.
Payroll Taxes: Cap on Maximum Earnings | ||
Type of Payroll Tax | 2023 Maximum Earnings | 2022 Maximum Earnings |
Social Security | $160,200 | $147,000 |
Medicare | No limit | No limit |
Source: Social Security Administration. | ||
Growth in the Social Security wage cap from $128,400 in 2018 to $160,200 in 2023 represents nearly a 25 percent increase over the past five years.
The IRS also raised the top amounts of all seven federal income tax brackets for 2023, which could increase the paychecks of many employees by taxing more of their earnings at lower rates and influence employee decisions on paycheck withholding amounts.
Adjust Systems, Notify Employees
Employees whose compensation exceeds the current 2022 taxable earnings cap of $147,000 may notice a slight decrease in net take-home pay beginning next January due to the payroll tax adjustment.
By the start of the new year, U.S. employers should:
- Adjust their payroll systems to account for the higher taxable wage base under the Social Security payroll tax.
- Notify affected employees that more of their pay will be subject to payroll withholding.
FICA Rates
Social Security and Medicare payroll taxes are collected together as the Federal Insurance Contributions Act (FICA) tax. FICA tax rates are statutorily set and can only be changed through new tax law.
Social Security is financed by a 12.4 percent payroll tax on wages up to the taxable earnings cap, with half (6.2 percent) paid by workers and the other half paid by employers. Self-employed workers pay the entire 12.4 percent.
For employers and employees, the Medicare payroll tax rate is a matching 1.45 percent on all earnings (self-employed workers pay the full 2.9 percent), bringing the total Social Security and Medicare payroll withholding rate for employers and employees to 7.65 percent—with only the Social Security portion limited to the taxable maximum amount.
| FICA Rate (Social Security + Medicare Withholding) | |
| Employee | 7.65% (6.2% + 1.45%) |
| Employer | 7.65% (6.2% + 1.45%) |
| Self-Employed | 15.3% (12.4% + 2.9%) |
| Note: For employed wage earners, their Social Security portion is 6.2% on earnings up to the taxable maximum. Their Medicare portion is 1.45% on all earnings. | |
The payroll tax rates shown above do not include an additional 0.9 percent in Medicare taxes paid by highly compensated employees on earnings that exceed threshold amounts based on their filing status:
- $250,000 for married taxpayers who file jointly.
- $125,000 for married taxpayers who file separately.
- $200,000 for single and all other taxpayers.
These wage thresholds, set by law, do not adjust for inflation and therefore apply to more employees each year.
Employers must withhold the additional Medicare tax from wages of employees earning more than $200,000 in a calendar year.
Bigger Payments for Retirees
Monthly Social Security and Supplemental Security Income benefits for more than 64 million people in the U.S. will jump by 8.7 percent in 2023—the biggest cost-of-living adjustment since the 1980s—the SSA also announced, reflecting this year's inflation spike. The adjustment will boost the average monthly retirement benefit by more than $140 starting in January.
The last time the Social Security benefits adjustment was higher was in 1981.
Estimated average monthly Social Security benefits for all retired workers payable in January 2023 will increase to $1,827, up from $1,681.
The Senior Citizens League, an advocacy group, called the benefits increase "the highest COLA that most beneficiaries living today have ever seen," but added that "a high COLA means exceptionally high inflation is impacting consumers."
Related SHRM Articles:
2023 Tax Bracket Changes Could Increase Workers' Take-Home Pay, SHRM Online, October 2022
Persistent Core Inflation Keeps Pressure on Wages, SHRM Online, October 2022
2023 Health FSA Contribution Cap Rises to $3,050, SHRM Online, October 2022
IRS Sets 2023 Health Plan Premium Affordability Threshold at 9.12% of Pay, SHRM Online, August 2022
IRS Announces Spike in 2023 Limits for HSAs and High-Deductible Health Plans, SHRM Online, April 2022
View 2023 Benefit Plan Limits & Thresholds Chart.
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