What is the Social Security Tax Limit?

Amanda Lacasse

The U.S. Social Security program is a pension program designed as insurance for retirees and the disabled. It allows those people who paid into the system while they were working — or surviving relatives of those people — to collect monthly benefits once they’ve retired or become disabled and are unable to work. Just as the monthly benefits have a set limit for those who qualify to receive payments, there also is an annual Social Security tax limit. That limit is based on salary and determines how much a person can pay into the system each year. If a person reaches that limit for a given year, Social Security taxes are no longer collected from his paycheck until the new tax year begins.

A Social Security benefits application.
A Social Security benefits application.

Since the program's inception in 1935, threshold amounts for both benefits and tax payments have changed. The Social Security tax limit uses the average wage index to compute how the government sets the wage cap. In 2009, the Social Security tax limit was set on yearly earnings of $106,800 USD with a tax rate of 6.2 percent being applied by both the employer and the employee. Any earnings above that cap would not have been subject to the tax.

A W-2 form reports wages, taxes withheld, and Social Security and Medicare taxes.
A W-2 form reports wages, taxes withheld, and Social Security and Medicare taxes.

The Social Security tax rate continued at 6.2 percent for both employers and employees in 2010. The 2011 Social Security tax limit on yearly earnings held at $106,800 USD, but a payroll tax holiday enacted by the U.S. Congress in 2010 reduced the employee rate to 4.2 percent for tax year 2011. The employer rate was left at 6.2 percent. That means an employee would be responsible for up to $4,485.60 in Social Security taxes in 2011, while his employer would be responsible for up to $6, 621.60.

The tax limit also applies to self-employed people, who are required to pay both the employer’s and employee’s contributions. That left self-employed people responsible for 12.4 percent in 2009 and 2010. When the Tax Relief Act of 2010 changed the Social Security tax withholding rate to 4.2 percent for the employees' portion, it made the rate 10.4 percent for self-employed people in tax year 2011.

In 1937, the Social Security tax limit was set at $3,000 USD of income and the combined rate was 2 percent of that amount, or $60. Since those early days, many changes have occurred to the original law. In 1965, the U.S. Congress passed the Medicare Hospital Insurance law, and that tax began to be collected the next year, subject to the same wage limits as Social Security taxation. Separate income limits were instituted from 1991 to 1993, after which the earnings threshold for Medicare was lifted completely. Cost-of-living allowances (COLAs) began to take effect in 1975 because of action taken by the U.S. Congress in 1972, and both the Social Security tax on income and the tax rate itself began to rise approximately 12 years after the program became active.

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