Whether you’re an employee of your corporation or a self-employed individual, it’s likely that your tax bill for Social Security and Medicare taxes will be higher in 2025. That’s because the wage base used to fix the ceiling on the Social Security portion of FICA and self-employment tax is rising. The Social Security Administration announced a cost-of-living adjustment of 2.5% for 2025. Here’s what you need to know so you can get ready for the coming year.
What’s the Social Security wage base?
Technically called the “old age, survivors, and disability insurance (OASDI) tax,” the Social Security tax is a fixed percentage of earnings—up to an annual ceiling. The same ceiling applies for employees, employers, and self-employed individuals.
- For employees: the employee and employer each pay this tax as part of FICA.
- For self-employed individuals: they pay both the employee and employer share as part of self-employment tax and then deduct one half.
The Social Security wage base—the ceiling for FICA and self-employment tax—in 2025 is $176,100 (up from $168,600 in 2024). The Social Security tax rate is unchanged for 2025: 6.2% for employees and employers; 12.4% for self-employed individuals.
So, how does the higher Social Security wage base impact employment taxes? The increased wage base means that for employees earning the maximum amount, employees and employers will each pay an additional $465 in Social Security tax in 2025. A similar tax hike applies to self-employed individuals with net earnings in excess of the wage base.
Medicare taxes
The Medicare tax—part of FICA and self-employment tax—is unchanged for 2025. It applies to all taxable employee compensation and net earnings from self-employment tax.
The Medicare tax rate is unchanged at 1.45% on employees and employers, and 2.9% on self-employed individuals.
Additional Medicare taxes
There are two additional Medicare taxes:
- 9% on earnings from a job or self-employment. This means wages, salaries, etc. that are taxable; it doesn’t include tax-free benefits. It also applies to net earnings from self-employment.
- 8% of net investment income (NII) over a threshold amount. For business owners who do not materially participate in their business, their earnings (e.g., a distributive share of partnership income) can be subject to this tax.
Both taxes apply only if modified adjusted gross income (MAGI) exceeds a threshold amount based on filing status. The threshold amounts are not adjusted for inflation and remain at $200,000 for singles, $250,000 for joint filers, and $125,000 for married persons filing separately.
Other matters for additional Medicare taxes:
- Employers must withhold the 0.9% tax when compensation of an employee exceeds $200,000, regardless of filing status. There is no comparable tax on employers.
- There is no deduction for anyone–employees and self-employed individuals—with respect to these additional Medicare taxes.
- Self-employed individuals must factor in both self-employment tax and the additional Medicare tax in figuring estimated taxes for the year.
Working and Social Security benefits
Those who attain the necessary age can collect Social Security benefits whether or not they are still working. In other words, there’s no requirement to be retired in order to collect what’s commonly referred to as retirement benefits. But those below the full retirement age may lose some all of their Social Security benefits if they continue to work and earn more than a set dollar amount.
- Those under the full retirement age (e.g., 66 years and 10 months in 2025) can earn up to $23,400 in 2025 ($1,950 per month), which is up from $22,320 and $1,730, respectively in 2024. For every two dollars of earnings over this limit, those in this age category lose one dollar of benefits.
- Those who attain full retirement age in 2025, an earnings limit of $5,180 per month applies for each month that benefits commence before the full retirement age ($220 per month more than in 2024). For every three dollars of earnings over this limit, those in this age category will lose one dollar of benefits.
Retirees who have attained the full retirement age can earn any amount without causing a reduction in benefits. But regardless of age, those who continue to work, part-time or full-time, must still pay Social Security and Medicare taxes. Working can favorably impact future retirement benefits because current earnings may be higher than in earlier working years and add more to the benefits computation.
Final thought
There has been much talk about the coming insolvency of the Social Security fund (which isn’t really a separate government account). It’s likely that the Social Security tax, or the way in which benefits are paid, will have to change in order to maintain solvency. When and how this will happen is unclear. What is certain is that the rules for 2025 are fixed and now you can plan ahead to set compensation and budget for employment taxes.
For additional information about employment taxes, see this list of blogs.
