Social Security Changes for 2022

The approximately 70 million Social Security beneficiaries will receive a cost-of-living adjustment (COLA) of 5.9% starting with the December 2021 benefits, which are payable in January 2022. This is the largest COLA adjustment in 39 years (Social Security Administration Press Release and Fact Sheet, 10/13/21; https://www.ssa.gov/news/press/factsheets/colafacts2022.pdf).

Along with the 5.9% benefits COLA comes an increase in the maximum amount of earnings subject to the 6.2% Social Security tax. For 2022, earnings up to $147,000 are subject to the tax, up from $142,800 in 2021. This means that employees who earn wages of $147,000 or more in 2022 will have the maximum Social Security tax of $9,114 (6.2% x $147,000) withheld from their wages ($260.40 more than in 2021); the employer pays the same amount as the employee.

Self-employed individuals will figure their 2022 self-employment tax (Schedule SE) by applying the Social Security tax rate of 12.4% (6.2% employer share plus 6.2% employee share) to their first $147,000 of net earnings, but this is after the net earnings are reduced by 7.65%.

All wages, regardless of amount, are subject to the 1.45% Medicare tax withholding rate, and on Schedule SE, all self-employment net earnings (after the 7.65% reduction) are subject to the 2.9% Medicare tax (employer and employee shares). The $147,000 ceiling applies only to Social Security tax, not Medicare. In addition, employees and self-employed individuals with earned income over $200,000, or $250,000 if married filing jointly ($125,000 if married filing separately), must pay Additional Medicare Tax of 0.9%.

Social Security earnings limit. For benefit recipients who are under the full retirement age for all of 2022, benefits will be reduced by $1 for every $2 of earnings over $19,560 (it was $18,960 in 2021). For recipients who attain the full retirement age during 2022, benefits will be reduced by $1 for every $3 of earnings over $51,960 (it was $50,520 in 2021), but only the earnings in months prior to the month of attaining full retirement age are counted. There is no benefit reduction for earnings starting in the month that the full retirement age is reached. Individuals born in 1955 reached full retirement age of 66 and 2 months in 2021 unless they were born in November or December, in which case they will reach full retirement age of 66 and two months in 2022. The full retirement age is 66 and four months for those born in 1956, so individuals born in January-August of 1956 will reach full retirement age in 2022, and those born in September through December of 1956 will reach full retirement age at 66 and four months in 2023.

A more favorable monthly rule generally applies if 2022 is the first year of receiving benefits. If it is, and if the recipient will not reach the full retirement age until after 2022, there generally will be no benefit reduction for any month in which 2022 earnings do not exceed $1,630, or 1⁄12 of the full-year limit of $19,560. If full retirement age will be reached in 2022, there will be no benefit reduction for any month prior to the month of attaining the full retirement age and in which earnings do not exceed $4,330, or 1⁄12 of $51,960. However, the favorable “first year” rule does not apply for a month in which the recipient is self-employed and devotes either more than 45 hours to the business or between 15–45 hours in a highly skilled occupation. Keep in mind that if benefits are reduced because of the earnings limits, they are added back to the benefits received after reaching full retirement age.