When people speak of social security limits, they are generally referring to the amount of social security taxes that can be removed from a paycheck. In the United States, the government will only tax a certain amount of a paycheck at a specific percent, and law defines this amount and percentage. Yet they are subject to changes, which means a limit today will probably not stand tomorrow.
As of the late 2000s social security limits were slightly above $100,000 US Dollars (USD). The limit rate is based on complex formulas that determine the average wage for workers and then decide what amounts above the average wage are considered eligible for social security tax. What this means for anyone earning a wage is that any money up to the defined limit has social security tax removed. If a person is a freelance worker, he/she still must remove the appropriate social security tax up to the defined limit.
Social security limits also include the percentage of tax that may be taken to pay into this program, and these are different than Medicare taxes. The limit on this tax is 6.2%, but has to be understood as subject to change in the future. What can be stated is how this formula might work, as of today. A person making $100,000 USD would pay $6200 USD per year in social security taxes, and an employer would pay the same amount. The freelance worker would pay the employer and self-share and would contribute $12,400 USD per year.
The full amount of salary is important. People could make under $100,000 USD but have different benefits provided by a company that raise their salary, even if these benefits don’t come home in a paycheck. It may be possible to end up paying more social security taxes than actual money earned, if an employee gets certain fringe benefits. In contrast, some employee benefits may reduce gross earnings, and these could include things like participation in flexible spending or health savings accounts. Possibly purchase of various types of insurance lower perceived salary, too.
Where social security limits get particularly interesting is when a person’s income exceeds the current limit. All income above the limit is not subject to social security tax. People who make larger salaries need to keep an eye on this and make certain that no more than the appropriate tax is withdrawn. Accidental overtaxing can happen easily if people work several jobs that accrue a lot more income than the limit amount. Of course, should this occur, taxpayers can get their money back by filing appropriate forms or year-end taxes.
Social security limits might additionally mean how much money people get when they retire. This is also based on complex formulas that include amount made over lifetime, the claimant’s status (spouse, widow, child of deceased, claimant), and at what age the claim occurs. Age and current employment may change limits. People who retire early and work might get less money. Given the different ways that entitlement to social security payments could be derived, it makes sense to speak with a social security office employee to determine exactly how today’s retirement might affect future payments.