Senators Bernie Moreno (R-OH) and Elizabeth Warren (D-MA) made a proposal in a New York Times Op-Ed, to “save” Social Security by lifting the cap on earnings subject to payroll tax. This would result in one of the largest tax increases in recent history.
It would amount to the the equivalent of a drop in Lake Michigan.
For 2026, the Social Security tax applies only to the first $184,500 of an employee’s wages. This threshold is adjusted annually for growth in the national average wage index.
The 12.4% payroll tax is split evenly between the employee and the employer. The cap mirrors the program’s benefit structure.
During retirement, Social Security replaces a share of income only up to that taxable maximum. The Moreno-Warren proposal would apply the payroll tax to all earnings above the cap, with no corresponding changes in benefits.
To understand why this seemingly simple fix would not restore balance to the trust fund, we must first grasp the scale of the problem.
The most recent Social Security Trustees Report shows that by the fourth quarter of 2032, the Old Age Survivors Trust Fund (OASI) will be able to pay only 78 percent of scheduled benefits. This means that under current law, benefits would be reduced by 22 percent to restore actuarial balance in 2032 if no other changes are made to the program.
The total shortfall over the next 75 years equals $25 trillion, or about 1.3 percent of GDP. Without other changes, restoring solvency through 2100 would require an immediate, across-the-board payroll tax increase on the current payroll tax base of 4.25 percentage points.
The Social Security Administration (SSA) modeled what would happen if the payroll tax were uncapped with no benefit changes and found this would return the program to annual surpluses for just three years, through 2029. At that point, annual deficits would resume.
A payroll tax increase of 12.4 percentage points without being capped would be the largest tax increase since 1982, at about 0.83% of GDP in 2027. This is well above the approximately 52% revenue-maximizing rate estimated by economists at the Treasury and the Joint Committee on Taxation.
Others have estimated that eliminating the payroll tax cap would reduce long-run GDP by 1.5% and cost 1.8M jobs.
Let me leave you with this…
To explain some of the most basic tax planning concepts to new customers, I ask the following question.
If you pay yourself $100 on a W-2, what does it cost in taxes? Is it…
A – 20% – 30% B – 30% – 40% C – 40% – 50% D – 50% or 60%
Most will answer A or B, but the correct answer is D. Please allow me to explain using the following assumptions…
1 – The Average Federal Income Tax Rate is 20%
2 – The Average State Income Tax Rate is 5%
3 – The Unemployment Rate is 5% on the first $13K of payroll
A payroll check has two sides: the Employee and Employer Sides. As entrepreneurs, we’re responsible for both.
On the Employee Side, we must figure the withholding from the $100 W-2: we take out $20 in Federal Withholding, $5 in State Withholding, and half of the Social Security and Medicare which is another $7.65. That leaves us with a net check of $67.35, but we aren’t done paying taxes yet.
On the Employer Side we also pay the other half of Social Security and Medicare which is another $7.65, plus $5 for Unemployment, totaling $12.65. In other words, you pay yourself $100, end up with $67.32, and it costs you $112.65.
Using round figures that’s about $45 in taxes for every $67 that ends up in your pocket. Even after the unemployment drops off after the first $13K in payroll, that’s still $40 in taxes for every $67 received.
Please tell me that the correct answer isn’t D. That’s still paying 59.71% in taxes.
And now these brilliant Senators want that to increase.
In tax planning, one strategy we use is the orderly and planned process of changing how an entrepreneur takes money out of their business to legally reduce their taxes. Did I mention that it’s completely legal?
If you’re having problems with your accounting and taxes or would like to do some tax planning, contact me today.
We’re all going to get through this. Let’s get through it together…
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, Accounting and Tax Work, Tax Planning, or Tax Representation, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
888-310-0300
www.AccountingSolutionsLtd.com
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