Social Security Administration Announces 2021 Social Security Changes

2021 Social Security Changes

On October 13, 2020, The Social Security Administration released their 2021 Fact Sheet, which announced the changes that will impact benefit recipients in 2021. Having this information will help tax professionals assist their clients with 2021 planning.

Highlights of the 2021 changes

Social Security Recipients receive a raise in 2021

The Cost of Living Adjustment (COLA) for 2021 is 1.30%.

Tax rates

Tax rates for employees remain unchanged at 7.65% (6.20% Social Security component, 1.45% Medicare component). The employer also contributes these same percentages of an employee’s earned income.

Tax rates for self-employed persons also remain unchanged at 15.30% (12.40% Social Security component, 2.90% Medicare component).

There is an 0.9% additional Medicare tax for individuals earning more than $200,000 ($250,000 for married filing jointly couples).

Maximum Taxable Earnings

The Social Security maximum earned income component increases from $137,700 in 2020 to $142,800 in 2021.

Note. Remember that the Medicare component is unlimited. This means every dollar of earned income is subject to Medicare tax.

Earnings Required to Earn One Quarter of Coverage

For 2021, one quarter of earnings equals $1,470 of earned income during the quarter. This is increased from $1,410 in 2020.

Maximum earnings allowed for a Social Security Recipient under Full Retirement Age (FRA)

For 2021, this limit is $18,960 per year, which breaks down to $1,580 per month. The 2020 limit was $18,240 annually or $1,520 maximum per month.

For a person receiving benefits who is under full retirement age (FRA), $1 of benefits is lost for every $2 the benefit recipient earns in excess of the above limits. This rule ceases to impact recipients once they reach FRA.

It is worth noting that this limit refers to earned income, such as W-2 wages or net self-employment income.  Other items of income a recipient may receive such as pension, interest, capital gains, etc., enter into the calculation to determine how much, if any, of the recipient’s Social Security benefits may be includable as taxable income, but these non-earned income items do not impact a recipient’s benefits under full retirement age.

For benefit recipients who reach FRA in 2021, their earnings limit is only applied in the months prior to reaching FRA. For 2021, the earnings limit is increased from the 2020 limit of $48,600 ($4,050 per month to $50,520 or $4,210 per month) before earnings will cause benefits to be owed back to Social Security. If earned income exceeds this limit, $1 of benefits will be withheld for every $3 the recipient earns in excess of the limit.

by Tom O’Saben, EA