2018 Payroll Tax Cap Will Nudge Slightly Higher

12 million earners will have more income subject to Social Security FICA tax; 2018 tax brackets adjusted upward

By Stephen Miller, CEBS Oct 17, 2017
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updated on Nov. 20, 2017

The maximum amount of earnings subject to the Social Security payroll tax in 2018 is $128,700 up by $1,500 from the $127,200 maximum for 2017, the Social Security Administration (SSA) announced on Oct. 13.

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

$128,700

$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 over 1.1 percent is smaller than the 7.3 percent increase that took effect at the start of 2017, which 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.

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 Brackets

Income tax bracket adjustments for tax year 2018 were issued on Oct. 19 by the IRS in Revenue Procedure 2017-58.

The IRS encourages wage earners to consider a tax withholding checkup. Taking a closer look at the taxes being withheld now can help ensure the right amount is withheld, either for tax refund purposes or to avoid an unexpected tax bill next year.

"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.

A comparison of income tax rates and ranges for 2017 and 2018 follows below.

Note: Congress Tackles Tax Reform

On Nov. 2, House Republicans unveiled their long-awaited tax bill, which would reduce the seven current income-based tax rates to four: 12 percent, 25 percent, 35 percent and 39.6 percent. 

Senate Republicans released their proposal for tax reform on Nov. 9. The Senate version would lower the top individual tax rate to 38.5 percent from 39.6 percent but keep the current number of individual tax brackets at seven instead of reducing them to four.

However, it is unclear if broad-based tax reform will be passed, and if it is, when that might happen. Efforts in Washington bear watching, but as of now the following brackets are scheduled to take effect on Jan. 1, 2018.


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

Tax Rate 2017 Taxable Income 2018 Taxable Income
10%$0 – $9,325
$0 – $9,525
15%$9,326 – $37,950
$9,526 – $37,700
25%$37,951 – $91,900$37,701 – $93,700
28%$91,901 – $191,650$93,701 – $195,450
33%$191,651 – $416,700$195,451 – $424,950
35%$416,701 – $418,400$424,951 – $426,700
39.6%$418,400+
$426,700+

 

Married Filing Jointly (and surviving spouse)

Tax Rate 2017 Taxable Income 2018 Taxable Income
10%$0 - $18,650$0 – $19,050
15%$18,651 – $75,900$19,051 – $77,400
25%$75,901 – $153,100
$77,401 – $156,150
28%$153,101 – $233,350$156,151 – $237,950
33%$233,351 – $416,700$237,951 – $424,950
35%$416,701 – $470,700$424,951 – $480,050
39.6%
$470,700+
$480,050+

 

Married Filing Separate Returns

Tax Rate 2017 Taxable Income 2018 Taxable Income
10%$0 – $9,325$0 – $9,525
15%$9,326 – $37,950$9,525 – $38,700
25%$37,951 – $76,550$38,701 – $78,075
28%$76,551 – $116,675
$78,075 – $118,975
33%$116,676 – $208,350
$118,976 – $212,475
35%$208,351 – $235,350
$212,476 – $240,025
39.6%$235,350+240,025+

 

Heads of Households

Tax Rate 2017 Taxable Income 2018 Taxable Income
10%$0 – $13,350$0 – $13,600
15%$13,351 – $50,800$13,601 – $51,850
25%$50,801 – $131,200$51,851 – $133,850
28%$131,201 – $212,500$133,851 – $216,700
33%$212,501 – $416,700$216,701 – $424,950
35%$416,701 – $444,550$424,951 – $453,350
39.6%$444,550+
$453,350+

Revenue Procedure 2017-58 also states that among other income tax adjustments for 2018:

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


Related SHRM Articles:

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

 

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