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12 million earners will have more income subject to Social Security FICA tax; 2018 tax brackets adjusted upward
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:
Source: Social Security Administration.
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:
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.
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.
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:
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.
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.
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
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.
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:
"There is no earnings test for Social Security recipients in months following attainment of normal retirement age," explained Martin and Eisner.
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)
Married Filing Jointly (and surviving spouse)
Married Filing Separate Returns
Heads of Households
Revenue Procedure 2017-58 also states that among other income tax adjustments for 2018:
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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