Each year, the payroll tax cap is adjusted to account for inflation, and the threshold determines the maximum amount of income that is subject to Social Security payroll taxes. For 2025, the payroll tax cap will be raised, meaning higher earners could see an increase in the amount of Social Security taxes they owe.
The payroll tax cap refers to the maximum amount of a worker's income that is subject to Social Security taxes, which are taken from each paycheck. In 2024, the cap is set at $160,200, meaning any income earned above this amount is not subject to Social Security taxes. The cap is adjusted annually based on changes in the national average wage index.
For 2025, the payroll tax cap will be raised to $165,000. This increase means that workers earning more than $165,000 in 2025 will see an increase in the amount of their income subject to Social Security taxes. For high earners, this change will result in a higher payroll tax liability.
While the Social Security tax rate of 6.2% for employees remains the same, this increase in the cap means that a larger portion of higher earners’ income will be subject to these taxes.
In simple terms, the higher cap means that individuals with wages above $165,000 will pay more in Social Security taxes in 2025. For example, if your income exceeds the 2025 cap, you will pay 6.2% on the additional amount above $165,000. This increase in taxable income could have a noticeable impact on take-home pay for those with high earnings.
While the payroll tax cap is generally beneficial for lower- and middle-income workers (since their entire income is subject to the tax), higher earners will face an increased tax burden as a result of the cap's increase. For workers already near the cap, this adjustment can lead to additional payroll tax payments, effectively raising their total tax liability.
For high earners, the increase in the payroll tax cap for 2025 means you may need to adjust your financial planning. This could involve preparing for higher Social Security tax payments in the coming year. If you’re self-employed or run a business, you may also need to account for the increased tax burden in your financial strategy.
