Each year, changes to the Social Security tax wage base have a unique impact on affluent investors, business owners, and pre-retirees. The increase in the wage base for 2024 is the same, signaling the need for these groups to understand how it impacts their finances and how to navigate the landscape ahead.
Historical Context: The Significance of the Wage Base Increase
The Social Security wage base is pivotal in determining how much Social Security tax is deducted from one's earnings. Historically, when the national average wage index increases, the wage base does, too. For instance, the jump from 2022 to 2023 was a substantial $13,200, the highest ever recorded. However, the increase for 2024, from $160,200 to $168,600, is a more modest $8,4002.
For high earners, these increases can translate to significant tax implications. For instance, with the wage base set at $168,600 for 2024, those earning above this threshold will pay an additional $521 in Social Security taxes than if the wage base had remained at $160,200.
The Impact on Business Owners and Self-employed Individuals
Self-employed individuals and business owners need to be especially aware of these changes. They are responsible for paying both the employer and the employee's portions of the Social Security tax, which totals 12.4% of taxable income up to the wage base. Thankfully, the IRS allows a deduction for the employer-equivalent portion, providing some tax relief for the self-employed.
Considerations for Affluent Investors and Pre-retirees
For affluent investors, this increase could mean an uptick in their tax liabilities. Pre-retirees, particularly those near or above the wage base, must factor in these changes as they strategize for retirement.
However, the news isn't all about tax increases. The Social Security COLA for 2024 is set at a 3.2% rise. This means retirees, including affluent investors already in their retirement phase, can expect a growth in their Social Security retirement benefits by over $50 from January 2024. Such adjustments can have a silver lining for those relying on Social Security as part of their retirement income.
It's also crucial to note that only some people are subject to the Social Security tax. Exemptions exist for specific groups like certain religious group members, students, employees of foreign governments, and non-resident aliens, among others7. For business owners or individuals who fall into these categories, it's essential to understand these exemptions to ensure they're paying the appropriate taxes.
In the constantly evolving financial landscape, staying informed and proactive is vital. For affluent investors, business owners, and pre-retirees, understanding the implications of such wage base changes can make a significant difference in financial planning and overall financial well-being.
At IM Wealth Partners, we believe in comprehensive financial planning that caters to your unique needs and goals. Whether you're working with existing advisors or starting from scratch, our team guides you every step of the way. If you have questions about the Social Security tax wage base increase or any other financial concerns, we invite you to contact us for a complimentary consultation.