Social Security payroll taxes are subject to annual increases thanks to the way tax rules are written. They are going up again in 2017, at least for a certain segment of the population, despite what many believe will be future efforts by the new administration to reduce taxes across the board. This year’s payroll tax increase is significant enough that employers and the self-employed really need to be prepared for it.

As Money Magazine and numerous other outlets have reported since the beginning of the year, there are two things in play this year. First is the rate of tax on eligible earnings, second is the minimum amount that is subject to Social Security taxes. The details are explained below. The upshot of the tax change is that as many as 12 million workers will pay more in Social Security taxes in 2017. Employed workers could pay up to $500 more while the self-employed could see their taxes go up by as much as $1,000.

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  • Taxes Indexed to U.S. Wages

The rules governing Social Security payroll taxes include a built-in mechanism that raises the rate of taxation in line with other economic indicators in order to ensure the government has enough money to pay benefits. Unfortunately, the payroll taxes are not indexed to inflation or GDP. They are indexed to wages. As average U.S. wages increase, so does the Social Security payroll tax.

There’s one other thing to consider before we explain the details of this year’s tax change. The law does not allow the government to assess a payroll tax in any year that Social Security recipients don’t also see a cost of living increase. That was the case in 2016. That means this year’s increase is actually two years’ worth. The increase of 7.3% is the largest such increase in 34 years.

It is important to understand two things here:

  • the increase applies to taxable earnings, not the rate of tax paid; and
  • it is the result of existing rules rather than something Congress or the current administration enacted this year.

With that explanation behind us, let us get to the details of the 2017 payroll tax change. As a company owner or executive, you might want to make a point of informing any of your employees who stand to be affected by the change.

  • Increased Minimum Income

As previously stated, the 7.3% increase is not an increase in the rate of taxation. It is simply an increase in the amount of income that can be taxed for Social Security. In 2016, the amount of income subject to Social Security taxes was $118,500. Anyone making more than that would not pay Social Security taxes on the excess. That minimum taxable amount increases to $127,200 for 2017.

Employees or self-employed workers who make less than $118,500 will see no difference in the amount of Social Security taxes they pay. Only those earning more will notice the difference.

In terms of payroll processing, the change is something third-party payroll companies should already be aware of. If your company contracts with the full-service payroll provider or handles payroll processing through an online payroll service, the increased deductions should be handled automatically. If your company does payroll in-house, you’ll have to adjust the deductions yourself.

Payroll tax increases related to Social Security are a fact of life. Dealing with them is yet another reason businesses should consider outsourcing their payroll to a third-party partner. Let the payroll company worry about the changes and put your time and effort into serving your own customers instead.


About The Author

Doug Hahn