Maximum Social Security Tax Increases in 2021

The maximum amount of earnings subject to the Social Security payroll tax increase in 2021 to $142,800, up from $137,700 in 2020. Earnings above $142,800 will not be subject to Social Security tax. In addition, a person’s future benefit amount does not increase beyond the maximum taxable earnings limit.

Self-employed workers pay 12.4% of their net earnings into the Social Security tax until they reach the annual maximum. Employees pay half that rate (6.2%), with their employers paying the other half. So, an employee who earns $142,800 or more in 2021 will pay Social Security tax in the amount of $8,853.60, and that person’s employer will pay another $8,853.60 in Social Security tax. Self-employed workers who earn $142,800 or more in 2021 will pay $17,707.20 because they are responsible for both the employer and employee portions of the Social Security taxes.

Social Security and Medicare payroll taxes are collected together as the Federal Insurance Contributions Act (FICA) tax. There is no wage limit on Medicare taxes. In fact, employers must withhold an additional 0.9% in Medicare taxes from wages of employees who earn more than $200,000 in a calendar year.

401(k) and IRA Contribution Limits for 2021 Remain Unchanged

Employees who are saving for retirement through 401(k) plans can contribute up to $19,500 in 2021. That's the same contribution limit in place for 2020. The catch-up contribution limit for employees age 50 and older also remains unchanged in 2021 at $6,500, for a total contribution limit of $26,000 for employees 50 and older.

IRA contribution limits in 2021 will also be the same as 2020. The 2021 limit on annual contributions to a traditional or Roth IRA remains unchanged at $6,000. The IRA catch-up contribution for people 50 and over remains $1,000, for a total contribution limit of $7,000 for IRA savers age 50 and older.

Even though contribution limits have not changed, certain income thresholds are increasing for 2021. Thus, a greater number of people will be able to make tax-deductible contributions to a traditional IRA or to contribute to a Roth IRA, because the maximum allowable income levels for such IRA contributions increase for 2021. In addition, the 2021 income limits to claim the Saver's Credit also increase for 2021, making more people eligible for this credit.

HSA contribution limits increase for 2021

Health savings account (HSA) contribution limits for 2021 are increasing by $50 for self-only coverage and $100 for family coverage.

An individual with self-only coverage under a qualifying high-deductible health plan (i.e. a health plan with a deductible of at least $1,400) can contribute up to $3,600 to their HSA in 2021. This is up from $3,550 in 2020.

For those with family coverage under a health plan with a deductible of at least $2,800, the 2021 annual limit on HSA contributions will be $7,200. This is up from $7,100 in 2020.

The HSA catch-up contribution for those aged 55 and older remains unchanged at $1,000. If both spouses are 55 or older, both spouses may make $1,000 catch-up contributions as long as they are HSA eligible (i.e. they have a high deductible health plan and are not enrolled in Medicare).

An HSA is a tax-friendly way to pay medical bills. Contributions to an HSA are tax-deductible, even if you don't itemize. Contributions made by your employer are excluded from gross income. Interest earned on HSA accounts is not taxed. Withdrawals are not taxed as long as the money is used to pay for qualified medical expenses.