Forever! Could the Social Security payroll tax be gone? The Bill That Might Make It Happen

There are initiatives in place to simplify the retirement payment process, and that could drastically change the Social Security payroll tax. The state income tax would not apply to social security benefits under a law that was submitted last week.

Bill drafters claim that just nine states offer tax benefits, including Vermont. According to the bill, the Social Security income tax will be phased down over eight years.

If approved, the tax would begin the next year and expire in 2034. Only individuals earning less than $50,000 and couples earning less than $65,000 are exempt from paying taxes under the existing arrangement.

The bill that could change the Social Security payroll tax 

Some older Americans are taken aback to learn that a percentage of their Social Security income is taxed each year when tax time arrives. Some beneficiaries may owe the IRS in April because the government does not immediately deduct taxes from benefits. In the meantime, the Old-Age and Survivors Insurance Trust Fund, which provides retirement benefits, is predicted to run out of money in 2033, and the Social Security trust funds are gradually drying up. 

Donald Trump Proposes Eliminating Income Tax, Advocates for Tariff-Based Revenue

The trustees of the Social Security and Medicare trust funds recently released a report stating that after that, the Social Security system will only be able to pay out 79% of retirement benefits due. However, lawmakers might feel more pressure to find a solution if a Social Security deficit is imminent. This year’s bill seeks to support the trust fund balance while also giving Social Security recipients a tax break. Representative Angie Craig, a Democrat from Minnesota, presented the You Earned It, You Keep It Act in January. There are two primary provisions in the bill:

• Federal income tax exemption for Social Security benefits
• Social Security payroll tax assessment for those with incomes of at least $250,000.

In 2025, payroll taxes for Social Security will be collected on earnings up to $176,100. We divide the 12.4% tax between employers and employees. Employees who work for themselves are liable for the full cost. In its current form, the plan would leave a doughnut hole of income free from Social Security payroll taxes, said Plan Smith, national director of tax technical services for the Reston, Virginia-based financial firm CBIZ MHM. 

The proposal would, for example, require high-income workers to pay Social Security payroll taxes on the first $176,100 of their income, not pay Social Security taxes on income between $176,101 and $249,999, and then pay taxes on income beyond $250,000. While the bill’s second component, which would remove the federal income tax on benefits, might send money back into the hands of older Americans, those more payroll taxes would support the Social Security trust fund.

Some are skeptical about the new Social Security payroll tax bill

House Ways and Means Committee action on the You Earned It, You Keep It Act is still pending. Additionally, it has been forwarded to the House Committee on Energy and Commerce for review; this year, it is unlikely to see any action. Additionally, it would violate President Joe Biden’s promise to keep taxes on those making under $400,000 unchanged. In its current form, it would increase Social Security payroll taxes on individuals earning over $250,000.

Any bills that do not pass must be reintroduced for additional consideration after the new year. A law similar to the You Earned It, You Keep It Act is unlikely to pass a Republican-controlled House and Senate, despite President-elect Donald Trump’s declared support for doing away with taxes on Social Security benefits. Historically, Republican lawmakers have opposed tax increases.

Republican voters, on the other hand, are less resistant to the concept. The Program for Public Consultation at the University of Maryland conducted a study in 2024 and found that 87% of American citizens, including 86% of Republicans, are in favor of requiring payroll taxes to be paid on all income over $400,000.

About The Author