SSA Revises Payroll Tax Cap for 2018; Tax Law Alters Rates and Brackets

The new amount for earnings subject to the Social Security tax is $128,400— not $128,700, as the SSA announced in October

By Stephen Miller, CEBS Nov 28, 2017
LIKE SAVE

Last updated on Jan 12, 2018. 

An earlier version of this article was posted on Oct. 17, 2017, under the title "2018 Payroll Tax Cap Will Nudge Slightly Higher."

On Nov. 27, the Social Security Administration (SSA) announced that it had revised the maximum amount of earnings subject to the Social Security tax (the "taxable maximum") for 2018, replacing the amount that the SSA had originally announced in October.

The new taxable-maximum amount for 2018, based on updated wage data, is $128,400, not $128,700, as the SSA had previously said.

The revised $128,400 taxable maximum is an increased of $1,200 over the $127,200 earnings maximum for 2017, rather than the $1,500 increase the SSA had announced on Oct. 13 (the SSA has also revised the online version of its October announcement).

"The reason given for this unusual change was that the wage base, which reflects national average wages, had to be recalculated when a good deal of salary data that had not been included in the original calculations was received after applicable deadlines," said Jeffrey S. Ashendorf, a benefits and compensation attorney with law firm FordHarrison in New York City.

He said of the $300 downward adjustment, "although small, the resulting revision is not inconsequential."

Of the estimated 175 million workers who will pay Social Security taxes in 2018, about 12 million will pay more because of the increase in the taxable-maximum amount, beginning on Jan. 1, 2018.

Payroll Taxes: Cap on Maximum Earnings

Maximum Taxable Earnings for:

2018

2017

Social Security

$128,400

$127,200

Medicare

No limit

No limit

Source: Social Security Administration.


The adjustment in the taxable-earnings cap is based on the government's estimate of recent inflation-adjusted wage growth. The 2018 jump of just under 0.95 percent is much smaller than the 7.3 percent increase that took effect at the start of 2017, from the $118,500 maximum for 2016 and 2015. The increase for 2017 was especially large because federal law kept the taxable maximum unchanged for 2016 due to a lack of cost-of-living increase in Social Security benefits.

Adjust Systems, Notify Employees

Those whose compensation exceeds the previous $127,200 maximum will see a decrease in net take-home pay if they don't receive an annual salary raise that makes up for the payroll tax's bigger bite.

By the start of the new year, U.S. employers should:

  • Adjust their payroll systems to account for the higher taxable wage base under the Social Security payroll tax.
  • Notify affected employees that more of their paychecks will be subject to payroll withholding.

Social Security is financed by a 12.4 percent tax on wages up to the taxable-earnings cap, with half (6.2 percent) paid by workers and the other half paid by employers. As a result, employers also will pay more in 2018, as their 6.2 percent share is applied to additional earnings.

Those higher costs could depress wage increases, economists note. Job positions and an employee's value are worth what an organization determines that they're worth (see link below, for instance), and an employer's share of payroll taxes are part of those costs. Consequently, compensation budgets should take into account the increased taxes that employers will pay for affected positions.

[SHRM members-only guide: How to Establish Salary Ranges]

At the same time, expect some pushback from employees who may want to be "made whole" for their share of the extended tax hit. In making these determinations, stay mindful that there is only so much budgeted for employee pay all round, compensation advisors note.


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 $128,700 taxable-maximum amount.

Those who are self-employed must pay both the employer and employee portions of FICA taxes.

2017 FICA Rate (Social Security + Medicare withholding)
Employee7.65%
​Employer​7.65%
​Self-Employed​15.30%
Note: The 7.65% tax rate is the combined rate for Social Security and Medicare. The Social Security portion is 6.20% on earnings up to the applicable taxable-maximum amount. The Medicare portion is 1.45% on all earnings.

Additional Medicare Tax

The tax rates shown above do not include an additional 0.9 percent in Medicare taxes paid by highly compensated employees.

Under a provision of the Affordable Care Act, the employee-paid portion of the Medicare FICA tax is subject to a 0.9 percent Additional Medicare Tax on amounts over statutory thresholds that are not inflation-adjusted and thus apply to more employees each year.

The threshold annual compensation amounts that trigger the Additional Medicare Tax are:

  • $250,000 for married taxpayers who file jointly.
  • $125,000 for married taxpayers who file separately.
  • $200,000 for single and all other taxpayers.

Additional Medicare Tax withholding applies to wages, compensation and self-employment income in excess of these thresholds in a calendar year.

This added tax raises the wage earner's Medicare portion of FICA on compensation above the threshold amounts to 2.35 percent; the employer-paid portion of the Medicare tax on these amounts remains at 1.45 percent.

(To learn more, see the IRS webpage Questions and Answers for the Additional Medicare Tax.)

The Additional Medicare Tax should not be confused with the Alternative Minimum Tax on high incomes, which does not involve mandatory payroll withholding.

Social Security Benefits to Increase

Monthly Social Security and Supplemental Security Income benefits for more than 61 million Americans will increase by 2 percent in 2018, the SSA also announced. The Social Security Act ties the annual cost-of-living adjustment (COLA) to increases in the Consumer Price Index, as determined by the Department of Labor's Bureau of Labor Statistics.

The 2018 Social Security cost-of-living percentage increase "will first apply to December 2017 benefits payable in January 2018," explained Majorie Martin and Andrew Eisner, consultants with Conduent, an HR advisory firm, in an alert about the SSA's announcement.

According to a new SSA fact sheet, the maximum Social Security benefit for workers retiring at full retirement age in 2018 will be $2,778 per month, up from $2,687 per month in 2017.

The SSA estimates that the average monthly Social Security benefits payable in January 2018 for all retired workers will be $1,404, up $27 from the 2017 average payment of $1,377.

Medicare Premiums

Premiums for Medicare Part B, which primarily covers doctors' visits and other outpatient care, can also change annually. For 2017 the base premium was $134, with higher earners paying more.

For 2018, the standard monthly premium for Medicare Part B enrollees will stay at $134. "Some beneficiaries who were held harmless against Part B premium increases in prior years will have a Part B premium increase in 2018, but the premium increase will be offset by the increase in their Social Security benefits next year," the U.S. Centers for Medicare & Medicaid Services (CMS) said.

The CMS announced Part B premium increases for 2018 on Nov. 17, and additional information is available at www.Medicare.gov.

The Medicare Part A annual inpatient hospital deductible that beneficiaries pay when admitted to the hospital will be $1,340 per benefit period in 2018, an increase of $24 from $1,316 in 2017.

Increases in Retirement Earnings Limit

For those claiming Social Security before reaching their full retirement age (age 66 for people born in 1943 through 1954), benefits are limited if they continue to work and receive earned income. These factors should be pointed out to employees who also are Social Security income recipients.

Until an individual reaches full retirement age, the SSA deducts $1 dollar in Social Security benefits for every $2 earned over the retirement earnings exemption limit. A separate earnings test applies in the year an individual reaches full retirement age. During that year, in the months prior to attaining full retirement age, the SSA deducts $1 dollar in benefits for every $3 earned over the limit until the month the worker turns age 66. The SSA announced that:

  • For recipients under Social Security normal retirement age in 2018, the annual exempt amount is $17,040 ($1,420 per month).
  • For recipients who reach normal retirement age in 2018, the annual exempt amount is $45,360 ($3,780 per month), which applies only to earnings in months prior to the month the recipient attains normal retirement age.

"There is no earnings test for Social Security recipients in months following attainment of normal retirement age," explained Martin and Eisner.


2018 Income Tax Rates & Brackets

Income tax bracket adjustments for tax year 2018 were issued on Oct. 19 by the IRS in Revenue Procedure 2017-58. However, the 2017 tax act that President Trump signed into law on Dec. 22 significantly altered tax brackets and income ranges starting Jan. 1, 2018.

The legislation, referred to as Tax Cuts and Jobs Act, changes the tax rates and the brackets of taxable income to which the rates apply (see below). It also increased the standard deduction for individuals who do not itemize deductions, suspended the deduction for personal exemptions and increased the child/family tax credit.


Update: IRS Issues New Withholding Tables for 2018

The IRS released new withholding tables for 2018 on Jan. 11. Employers were told to adjust employee withholding rates by Feb. 15, 2018. Workers do not need to resubmit Form W-4.

HR compensation and payroll managers should work with their internal payroll departments and payroll vendors to ensure that their systems are appropriately adjusted in light of the IRS guidance. 

See the SHRM Online article IRS Issues New Withholding Tables for 2018.


The IRS encourages wage earners to consider a tax withholding checkup. "By adjusting the Form W-4, Employee's Withholding Allowance Certificate, taxpayers can ensure that the right amount is taken out of their pay throughout the year," the IRS advised. "Having the correct amount withheld from paychecks helps to ensure that taxpayers don't pay too much tax during the year—and that  they have money upfront rather than waiting for a bigger refund after filing their tax return."

The level of income that is subject to a higher tax bracket also can influence a number of decisions by employees, including how much salary to defer into a traditional 401(k) plan, which reduces taxable income for a given year by the amount contributed, or whether to participate in a nonqualified deferred income plan, if that option is available through the employer.

The chart below shows the bracket changes that will take effect in 2018 as described in Title I of the 2017 tax act. For comparison, it's followed by a chart showing 2017 rates and the changes that were slated to take effect in 2018 absent passage of the tax bill.

Single Filing Individual Return (other than surviving spouses and heads of households)

Tax Rate 2018 Taxable Income
 
(as revised by the 2017 tax act)
10%$0 – $9,525
12%
$9,525 – $38,700
22%$38,700 – $82,500
24%
$82,500 – $157,500
32%
$157,500 – $200,000
35%
$200,000 – $500,000
37%
Over $500,000

 

Married Filing Jointly (and surviving spouses)

Tax Rate 2018 Taxable Income
 (as revised by the 2017 tax act)
10%
$0 – $19,050
12%
$19,050 – $77,400
22%$77,400 – $165,000
24%$165,000 – $315,000
32%$315,000 – $400,000
35%$400,000 – $600,000
37%
Over $600,000

 

Married Filing Separate Returns

Tax Rate 2018 Taxable Income
 (as revised by the 2017 tax act)
10%$0 – $9,525
12%
$9,525 – $38,700
22%
$38,700 – $82,500
24%$82,500 – $157,500
32%$157,500 – $200,000
35%$200,000 – $300,000
37%Over 300,000+

 

Heads of Households

Tax Rate 2018 Taxable Income
 (as revised by the 2017 tax act)
10%$0 – $13,600
12%$13,600 – $51,800
22%
$51,800 – $82,500
24%$82,500 – $157,500
32%$157,500 – $200,000
35%$200,000 – $500,000
37%
Over $500,000

The 2017 tax act also makes the following income tax adjustments for 2018:

  • The deduction for personal exemptions, which had been $4,050 for 2017, is suspended.
  • The standard deduction for single taxpayers and married taxpayers filing separately rises to $12,000 from $6,350.
  • The standard deduction for married taxpayers filing joint returns rises to $24,000 from $12,700.
  • The standard deduction for heads of household rises to $18,000 from $9,350.


The chart below shows the bracket changes that were slated to tax effect without passage of the Tax Cuts and Jobs Act:

Single Filing Individual Return (other than surviving spouses and heads of households)

Tax Rate 2017 Taxable Income Old 2018 Taxable Income
(Replaced by table above)
10%
$0 – $9,325
$0 – $9,525
15%$9,325 – $37,950
$9,525 – $37,700
25%$37,950 – $91,900
$37,700 – $93,700
28%$91,900 – $191,650$93,700 – $195,450
33%
$191,650 – $416,700$195,450 – $424,950
35%
$416,700 – $418,400$424,950 – $426,700
39.6%
Over $418,400
Over $426,700

 

Married Filing Jointly (and surviving spouse)

Tax Rate 2017 Taxable Income Old 2018 Taxable Income
(Replaced by table above)
10%
$0 - $18,650
$0 – $19,050
15%$18,650 – $75,900$19,050 – $77,400
25%$75,900 – $153,100
$77,400 – $156,150
28%$153,100 – $233,350$156,150 – $237,950
33%
$233,350 – $416,700$237,950 – $424,950
35%$416,700 – $470,700$424,950 – $480,050
39.6%
Over $470,700
Over $480,050

 

Married Filing Separate Returns

Tax Rate 2017 Taxable Income Old 2018 Taxable Income
(Replaced by table above)
10%
$0 – $9,325$0 – $9,525
15%$9,325 – $37,950$9,525 – $38,700
25%$37,950 – $76,550
$38,700 – $78,075
28%
$76,550 – $116,675
$78,075 – $118,975
33%
$116,675 – $208,350
$118,975 – $212,475
35%$208,350 – $235,350
$212,475 – $240,025
39.6%
Over $235,350
Over 240,025

 

Heads of Households

Tax Rate 2017 Taxable Income Old 2018 Taxable Income
(Replaced by table above)
10%$0 – $13,350$0 – $13,600
15%$13,350 – $50,800$13,600 – $51,850
25%
$50,800 – $131,200
$51,850 – $133,850
28%$131,200 – $212,500$133,850 – $216,700
33%$212,500 – $416,700
$216,700 – $424,950
35%$416,700 – $444,550
$424,950 – $453,350
39.6%Over $444,550
Over $453,350

Revenue Procedure 2017-58, now superseded by the Tax Cuts and Jobs Act, also stated that among other income tax adjustments for 2018:

  • The personal exemption would have risen by $100 to $4,150 from $4,050.
  • The standard deduction for single taxpayers and married taxpayers filing separately would have risen by $150 to $6,500 from $6,350.
  • The standard deduction for married taxpayers filing joint returns would have risen by $300 to $13,000 from $12,700.
  • The standard deduction for heads of household would have risen by $150 to $9,550 from $9,350.


Related SHRM Articles:

IRS Releases New Withholding Tables for 2018SHRM Online Compensation, January 2018

Tax Bill Alters Executive Pay, Affects Bonuses and Withholding, SHRM Online Compensation, December 2017

For 2018, 401(k) Contribution Limit for Employees Rises to $18,500, SHRM Online Benefits, October 2017

2018 FSA Employee Cap Rises to $2,650, SHRM Online Benefit, October 2017

IRS Sets 2018 HSA Contribution Limits, SHRM Online Benefits, May 2016

At Tax Time, Remind Workers About the Saver's Credit, SHRM Online Benefits, February 2017

 

Was this article useful? SHRM offers thousands of tools, templates and other exclusive member benefits, including compliance updates, sample policies, HR expert advice, education discounts, a growing online member community and much more. Join/Renew Now and let SHRM help you work smarter.


LIKE SAVE

SPONSOR OFFERS

Find the Right Vendor for Your HR Needs

SHRM’s HR Vendor Directory contains over 10,000 companies

Search & Connect