The maximum amount of earnings subject to the Social Security payroll tax will climb to $127,200 an increase of $8,700 from 2016. the Social Security Administration (SSA) announced on Oct. 18. 12 million workers will increase their contribution.
This adjustment, which takes effect Jan. 1, is based on the government’s estimate of real wage growth in the recent past. The 2017 jump in the taxable-earnings cap is the largest one-year increase since 1983, in part because federal law kept the taxable maximum unchanged for 2016 due to a lack of cost-of-living increase in Social Security benefits.
By Jan. 1 of each year, U.S. employers must adjust their payroll systems to account for the higher taxable wage base under the Social Security payroll tax—and should notify affected employees that more of their paychecks will be subject to payroll withholding. Those whose compensation exceeds the previous $118,500 maximum will see a decrease in net take-home pay if they don’t receive an annual raise that makes up for the payroll tax’s bigger bite.
FICA Rates Set by Law
Social Security and Medicare payroll taxes are collected together as the Federal Insurance Contributions Act (FICA) tax. FICA tax rates are statutorily set and therefore require new tax legislation to be changed.
For employers and employees, the Medicare payroll tax rate is a matching 1.45 percent on all earnings, bringing the total Social Security and Medicare payroll withholding rate for employers and employees to 7.65 percent each—with only the Social Security portion (6.2 percent) limited to the $127,200 taxable-maximum amount.