In the game of baseball, bases are anchored so they don’t move. The US social security program has bases too, though they’re not immoveable.
For example, the contribution and benefit base limits the amount of earnings subject to social security tax for a given year. This base is set in October for the next calendar year, based on changes in the national average wage index.
For calendar year 2017, the contribution and benefit base was $127,200. That meant employers, employees, and the self-employed were required to pay social security taxes of 6.2% (12.4% for the self-employed) on wages up to $127,200 during 2017.
In July 2017, the social security trustees report estimated the 2018 contribution and benefit base would be $130,500. In October 2017, social security announced the actual 2018 contribution and benefit base would be $128,700. On November 27, 2017, social security changed the base, citing new wage information received from a national payroll service provider.
Payroll taxes are the major source of income for the social security program. In addition to the dedicated payroll taxes, congress created another tax that funds the social security program.
Note: This information should not be considered legal, investment, or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment, or tax advice. Always consult your legal, investment, and/or tax advisor regarding your personal situation.
In October of each year, the social security administration announces adjustments that take effect the following January that are based on the increase in average wages. Based on the wage data social security had at the time of the October 2017 announcement, the maximum amount of earnings subject to the social security tax (taxable maximum) was to increase to $128,700 in 2018, from $127,200 in 2017.
The new amount for 2018, based on updated wage data reported to social security, is $128,400.
This lower taxable maximum amount is due to corrected W2s provided to social security in late October 2017 by a national payroll service provider. Approximately 500,000 corrections for W2s from 2016 resulted in changes for three items based on the national average wage: the 2018 taxable maximum, primary insurance amount bend points–figures used in the computation of social security benefits–and family maximum bend points. No other items based on national average wages were affected.
The change to the taxable maximum does not take effect until January 2018, and the updated bend points in the benefit computation only apply to people who initially become eligible for social security benefits in calendar year 2018. This does not affect current beneficiaries.
Taxation of social security benefits is another source of income for the social security and Medicare trust funds.
From the 2017 Trustee Report: Beneficiaries with incomes above $25,000 for individuals (or $32,000 for married couples filing jointly) pay income taxes on up to 50% of their benefits, with the revenues going to the OASDI trust funds.
This income from taxation of benefits made up about 3% of social security’s income in 2016.
Those with incomes above $34,000 (or $44,000 for married couples filing jointly) pay income taxes on up to 85% of benefits, with the additional revenues going to the Medicare trust fund.
This income from taxation of benefits made up about 8% of HI trust fund income in 2016.