On October 18, 2016 the Social Security Administration (SSA) announced that the maximum amount of wages subject to the Social Security payroll tax will increase in 2017 by $8,700 to $127,200. This adjustment, which takes place on January 1, 2017, is calculated by the SSA based on average wage increases.
Social Security payroll tax is collected with Medicare payroll tax as the Federal Insurance Contributions Act (FICA) tax. In a traditional employment relationship, FICA taxes are paid by both employers and employees. Employers and employees both pay 6.2% of taxable wage for the Social Security portion up to the annual maximum level and pay 1.45% of taxable wage for the Medicare portion. There is no limit on the Medicare portion, however under a provision of the Affordable Care Act, highly compensated employees are required to pay an additional 0.9% in Medicare tax for all wages over $200,000 per year. Employers are not required to pay this additional Medicare tax.
Self employed individuals are responsible for paying both the employer and employee portions of the FICA taxes.
Prior to January, employers should plan to notify affected employees that they will have additional wages subject to Social Security tax in 2017. Also, payroll systems should be modified to account for the increased Social Security taxable wage limit.