Most Americans know that their earnings are subject to the Social Security payroll tax. Not as many are aware that the amount of earnings subject to the tax, while liable to change, is capped at the same level for everyone, regardless of total earnings. This year, the maximum wage earnings subject to the payroll tax is $132,900.
The cap on the Social Security payroll tax means that those with the highest earnings effectively pay a lower rate. People who earn a million dollars a year pay this tax on about an eighth of their earnings. People who earn a quarter of a million dollars pay the tax on just over half their earnings. It is important to note that this just applies to wage earnings, not other forms of income. If the individual earning $250,000 a year makes another $250,000 from investments, then they end up paying the Social Security tax on about a fourth of their income. The vast majority of workers fall below the $132,900 cap though, and have significantly less stock or other income, if any. As a result, all or most of their income is subject to the payroll tax.
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