The Social Security Administration (SSA) has announced that the maximum earnings subject to the social security payroll tax will increase by almost 9 percent in 2023. Here’s what you should know about the increase.

What is the wage cap?

Every year, the taxable wage cap is adjusted based on increases in the national average wage index, which is calculated annually by the SSA. Due to the recent surge in inflation, the wage increases have been determined earlier than usual.

What is the new maximum earnings cap for payroll taxes?

So, for 2023 employers must withhold the following amounts:

• 6.2% Social Security tax on the first $160,200 of employee wages (maximum tax is $9,932.40; i.e., 6.20% × $160,200
• 1.45% Medicare tax on all employee wages
• 2.35% Medicare tax (regular 1.45% Medicare tax + 0.9% additional Medicare tax) on all employee wages in excess of $200,000.

Have the FICA rates changed?

Medicare and social security taxes are collected together, under the umbrella of the FICA (Federal Insurance Contributions Act) tax.

Starting January 1, 2023, here are the rates:

Highly compensated employees pay an additional 0.9 percent in Medicare taxes (based on their filing status) on earnings that exceed the following threshold amounts:

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

These amounts are not adjusted for inflation.

Make note that if your employees earn more than $200,000 in a calendar year, you must withhold the additional Medicare tax from their wages.

Any social security changes for retirees?

Also starting January 1, 2023, monthly Social Security and Supplemental Security Income benefits for retirees will jump by 8.7 %— marking the biggest cost-of-living adjustment in over 40 years. Accordingly, starting in January, the average monthly retirement benefit will increase by more than $140.

What about those who continue working while collecting Social Security benefits?

Social security beneficiaries under the full retirement age (between 65-67) who are still working receive a reduced monthly benefit if they earn more than the annually adjusted threshold.

For 2023, $1 in benefits will be withheld for every $2 in earnings above $21,240 (increase from $19,560 in 2022). Those impacted by this who will reach retirement age in 2023 will have $1 in benefits withheld for every $3 in earnings exceeding $56,520 (up from $51,960) until the month they reach normal retirement age (NRA). Beyond that month, there is no limit.

What to do to prepare for the increase

If you have employees whose earnings exceed the current 2022 cap of $147,000, you will want to notify them that they may have a slightly lower net take home pay due to the increase.

Before January 1, be sure to:

• Modify your payroll systems to account for the higher taxable wage base
• Alert impacted employees that more of their pay will be subject to payroll withholding

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