(The Motley Fool) - The vast majority of Social Security benefits are paid for by taxes on current workers. Every year, 12.4% of people's salaries -- up to a limit -- gets paid toward that program.
If you're a standard employee, half that amount gets paid directly by you as an employee, and the other half gets paid by your employer on your behalf. If you're self-employed, you pay both halves of that tax.
In 2023, the salary limit subject to Social Security tax is $160,200. In 2024, that limit increases to $168,600. As a result, if you're a high earner, you will pay more in Social Security taxes in 2024 than you did in 2023. Indeed, as a higher earner, the total additional Social Security taxes you'll face in 2024 will be as much as $1,041.60 , even if your income remains exactly the same.
What can you do about it?
If you find yourself in that situation, there isn't much you can do about it, unless you have some control over how much income you earn and what shape that income takes. Typical tax reduction strategies like charitable donations or deductible 401(k) contributions won't reduce your exposure to Social Security payroll taxes.
If you do have some measure of control over your income, then you've got two options: Either earn more or earn less. From an earning more perspective, any money you earn above that limit is no longer subject to Social Security tax, which can help provide some relief, at least until you break into the higher income tax brackets.
When it comes to earning less, if you're self-employed, that doesn't necessarily mean taking home less. If your self-employed business is structured as an S corporation, you can often determine how much of your income is salary and how much of it is a distribution of earnings. The salary portion is subject to the Social Security tax, while the distribution of earnings portion is not.
You do need to be careful with that approach, though. Your salary needs to be deemed reasonable for the type of work and location you're performing that work from. Otherwise, the IRS might impose back taxes, penalties, and interest on the money it thinks you should have received as salarY-style income.
Also note that ultimately, your own Social Security benefit is based on your earnings record over time. The lower your taxable earnings, the lower the benefit you'll ultimately receive. So in addition to being sure to stay in the IRS' good graces, if you follow this approach, be sure you've got a plan to invest enough to make up for the lower benefit you'll be accruing.
As for actions you can take to earn more, in addition to the somewhat obvious one of "work smarter or more," consider any deferred compensation you may have available to you. Many deferred compensation plans have flexible windows in terms of when you can recognize that income, which can give you some level of control over how much of it you earn in 2024.
Get started now
With 2024 just getting started this week, now is a great time to get your plans in place for dealing with the higher Social Security taxes you'll face as a high earner. You can choose to try to boost your income, get your salary down, or just go ahead and pay the higher taxes. Whichever path you take, by making your decision and plans now, you'll give yourself the most time to make them a reality for 2024.
The $21,756 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $21,756 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after.
By Chuck Saletta | The Motley Fool
