Stock investment – The Last Day Millionaires Pay Social Security Taxes in 2018 — The Motley Fool

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Social Security provides valuable benefits for tens of millions of Americans, and many more fully expect to take advantage of Social Security income in retirement or if they become disabled in the future. In exchange for their benefits, Americans pay payroll taxes on their wages, and the vast majority of workers have money taken out of every single paycheck that they receive.

Yet what many people don’t realize is that each year, high-income taxpayers get an early reprieve from having to pay Social Security. For those who make $1 million in wages, that break comes this year on Feb. 16 — just 47 days into the new year. Below, we’ll look at why that happens and whether those who argue that the situation isn’t fair to rank-and-file American workers are justified in their outrage.

Image source: Getty Images.

How Social Security charges payroll taxes

Social Security gets most of its revenue by withholding payroll taxes from the pay that workers receive. The current payroll tax rate takes away 6.2% of your earnings, with your employer withholding that amount from each of your paychecks. In addition, your employer pays an equivalent 6.2% amount from its own money, making the total 12.4%. If you’re self-employed, then you’re on the hook for the full 12.4% amount yourself.

There’s a maximum amount of wages against which the government collects Social Security payroll tax. That amount goes up during most years, adjusting for increases in the overall average wage. For 2018, the wage base for Social Security taxation is $128,400. That means that the maximum amount of tax that employers can withhold from employee paychecks in 2018 is 6.2% of $128,400, or $7,960.80. After an employer holds back that amount, any additional wages are no longer subject to Social Security withholding.


What that means is that those who earn more than the wage base for Social Security in any given year eventually get to a point after which their paychecks get bigger, because their employers no longer withhold Social Security tax. If you make $1 million, then that time comes after 12.84% of the year has gone by. Doing the math, 12.84% of 365 days works out to just under 47 days. By Feb. 16 — 47 days into the year — millionaire workers will have reached the limit and will have no further Social Security taxes to pay.

Is the wage base fair?

Some policymakers have argued that Social Security payroll taxes are regressive because of this maximum limitation on the taxes it can collect. Effective tax rates for millionaire earners from Social Security taxes withheld throughout the year amount to just 0.8%, a pittance compared to the 6.2% that lower-income workers have taken out of their checks. Moreover, lawmakers have changed the policy on Medicare taxes, which are similarly withheld from employee pay and which had their previous cap removed years ago. Now, an unlimited amount of earnings is subject to the Medicare-related payroll tax of 1.45%.

Opponents of removing the wage base argue, however, that there’s already a trade-off from having the wage base in place. In exchange for having their tax liability limited, high-income earners also have limits placed on the amount of Social Security benefits that they can earn. If Social Security payroll taxation were unlimited, then lawmakers would have to decide either to make potential monthly benefits similarly unlimited or to remove the connection between average career wages subject to tax and what one receives from the program.

Don’t expect changes anytime soon

Calls to increase the Social Security wage base significantly beyond current levels got louder during the 2016 presidential election, but after the victory of the Republicans in the elections, prospects for major increases to Social Security taxation all but disappeared. Millionaires are therefore unlikely to see any changes to what they pay in Social Security taxes, except for the small increases to the wage base that happen during most years. That will make Feb. 16 a nice day for those who are on pace to bring home $1 million in earnings during 2018.

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