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The social security cap is a limit on the amount of money or earnings each year that can have social security taxes removed from them. This amount has climbed from year to year and it’s important to be aware of the present cap in order to take advantage of it. Presently, the cap has climbed to slightly over $100,000 US Dollars (USD). Making more than that amount means having some income that isn’t subject to social security taxes.
The amount of taxes taken from salary for social security is set at the same percentage rate. This is 6.2%, and it means that any salary under the cap is taxed at this amount. At the same time, an employer who pays an employee also pays 6.2% of total pay. Figuring social security taxes changes when people do not have an employer and work as independent contractors. They will have to pay a higher percent because they lack employer contributions.
An example of how the social security cap works can be useful. If a person makes $200,000 USD a year and is a regular employee, the tax is withdrawn to the amount of the cap, both employer and employee paying 6.2%. Once the cap is reached, these contributions stop. Thus, approximately halfway through the year, social security taxes would no longer be withdrawn, though it’s important to note that Medicare taxes continue to be removed from the paycheck.
The business of having a social security cap is fairly easy to understand if an employee works a single job. Yet, some people hold several jobs at which they could be paid generous amounts. Employers don’t always track the pay given to employees by other employers.
In this scenario the employee may need to be more proactive in observing when the social security cap is reached. If an employee holds two separate jobs that each earn $100,000 USD per year, he’ll have to watch the point at which earnings from both jobs have reached the social security cap. When this isn’t watched, social security taxes will continue to be withdrawn, though in filing taxes at the end of the year the employee can regain these overpaid taxes. It’s easier to simply instruct the payroll department of the two companies to stop withdrawing this amount, which they’re usually willing to do, provided the employee has proof the cap has been reached.
For people who are freelancers or independent contractors, it’s simpler to determine once earnings have hit the social security cap. People can then stop removing money for this amount. On the other hand, it’s very important that an independent contractor verify the right amount has been deducted up to that point. Records should be checked to determine no more social security taxes are owed. It should be reiterated this cap doesn’t apply to other types of taxes and doesn’t change Medicare or regular income tax amounts.