The rich will pay as much this social security tax in 2019 – The Motley Fool

This month has been important for social security and its more than 62 million beneficiaries. On October 11, 2018, the Bureau of Labor Statistics (BLS) released its September inflation data, which provided the Social Security Administration (SSA) with the final data point needed to calculate the adjustment of the cost of living of 2019, or COLA. Think of COLA as the "increase" that recipients receive from one year to the next.

The result, thanks to rising energy and housing prices, is a substantial increase in benefits for 2019, which is the biggest increase since 2012. Since Medicare Part B premiums are not the same as in the previous year. increase that by just over 1%, this should a net payment actually higher for a majority of beneficiaries next year.

An introduction to the payroll tax of social security

However, the annual publication of COLA is only one of the a lot data points that are adjusted each year by the SSA. In addition to the 2019 COLA, the SSA also announced changes to the salary tax earnings ceiling for the following year. In essence, this means that the richest workers will contribute more to the social security program in 2019.

Of the three sources of funding for social security – the payroll tax, the interest income on its asset reserves and the taxation of benefits – the 12.4% payroll tax on income won is undoubtedly the bulk of the work. Last year, of the $ 996.6 billion in revenue collected for the program, $ 873.6 billion came from the payroll tax collected on earned income.

But what is interesting with the 12.4% social security contributions is that not all income is subject to it. In 2018, earnings earned up to $ 128,400 are subject to payroll tax, with earnings above this amount being exempt. This allows a small percentage of working Americans (less than 1 in 10) to evade their social security contributions with some, if not most, of their income, depending on income.

Why not apply the payroll tax to all incomes? The answer is simple because the SSA also caps the maximum retirement benefit each year at retirement age. In 2018, whether you earn an average of $ 150,000 in annual income or $ 10 million a year, your maximum retirement allowance at the full retirement age is $ 2,788 per month. Since there is a limit to how much an individual can be paid by Social Security at retirement age, there is also a limit as to the amount of income earned taxable by the tax on retirement. payroll of Social Security.

Here's why the rich will need more social security tax in 2019

Assuming that the COLA is positive – the earnings cap remains unchanged in years when no COLA is passed – the payroll tax ceiling is increased to the same level as the national index average wages (NAWI). As INFNA increased by 3.45% in 2017 ($ 48,642.15 in 2016 to $ 50,321.89 in 2017), the payroll tax ceiling will increase by 3.5% in 2019, rounded to the nearest 0.1%. year, compared with $ 128,400 in 2018. This means that less than 1 in 10 wealthy workers earning more than $ 128,400 will have to pay more for the program next year.

Of course, there is a difference between being a wealthy employee and being a self-employed person. Regardless of the salary you earn each year, if you are employed by someone else, your employer will cover half of your social security contributions up to the limit ($ 132,900 in 2019) . Rather than paying 12.4%, you, as an employee, owe 6.2%, your employer assuming the other half. So, if we talk to an affluent employee, he or she could owe a maximum of $ 8,239.80 in 2019, up to $ 279 more than what he paid in 2018 .

If you are self-employed, you can expect more of your pocket. The self-employed are responsible for the entire social security tax of 12.4 per cent, up to $ 132,900. Next year, this will cost $ 16,479.60, or $ 558 more than in 2018, in the event that a self-employed person would reach the ceiling both years.

Many incomes are currently escaping the tax

Despite this increase in the payroll tax ceiling, it should be noted that a large amount of earned income is escaping the tax each year.

According to SSA data, revenues of about $ 300 billion would have escaped tax in 1983 (which was above the taxable ceiling). However, this figure had quadrupled to reach $ 1.2 trillion in 2016. Even with annual increases in the tax cap commensurate with average wage growth, the rich are seeing their money grow at a much faster pace, allowing thus to more income to escape the tax.

Now, here is where things get interesting. If the cap was completely removed and as Medicare, all earned income was subject to program taxation, it would almost certainly wipe out the $ 13.2 trillion shortfall that social security suffered between 2034 and 2092. The reason for which the cap has not been significantly increased to ensure that less tax is exempt from income tax is related to the aforementioned cap of monthly payments at retirement age , as well as the inability of Republicans and Democrats to agree on an amicable solution to the program's shortfall.

In other words, even if the cap is up, more income than ever may escape the Social Security wage tax.