Social Security is one of the many important ingredients to retirement for Americans. Most Americans in their 60s get access to thousands of dollars each month for the rest of their life. All they need to do is apply for it. However, many times people do not plan during their working years to prepare for Social Security. Depending on the type of retirement you want, it is important to understand how your monthly Social Security amount will turn out.
Key Takeaways:
- Workers pay 6.2% (or 12.4% if self-employed) on income up to a wage cap of $176,100 in 2025, with some tax planning opportunities for business owners.
- Benefits can start at 62 but increase significantly if delayed to 70, with payout size based on earnings history and timing.
- Most high-earners won’t fully recoup what they paid in, so supplementing retirement with personal savings and smart tax strategies is essential.
Social Security “Tax”
For most working Americans, part of their income is subject to the 6.2% Social Security tax. It shows up many times on paystubs under the “OASDI” header. Simply put, if you made $100,000 this year, then likely around $6,200 was contributed to Social Security. This is technically for employees, since employers are required to “contribute” an additional 6.2% on the same income. If you are self-employed and make $100,000, then both sides become your responsibility, and you will owe $12,400 (12.4%) for Social Security Tax for the year. If you add the similar 2.9% tax for Medicare, you get to the more recognizable 15.3% Self-Employment tax.
This tax occurs every year, as long as your income remains below the Social Security Wage Base. For 2025, the wage base level is $176,100. Above this, any additional income does not apply to the tax. Depending on your stance on Social Security, this could be helpful or not. From the social security perspective, the most you ever made (whether $200,000 or $900,000) is the wage base level. For 2025, that means Social Security will receive $21,836.40 for each self-employer above the wage base for the year.
Fortunately, the employer’s side of the social security tax is deductible. Therefore, even though the $100,000 owner paid $12,400 to Social Security. $6,200 can be deducted from their income for the year. While nice, this could be a factor when determining S-Corp election, for example, where owners are purposely paying themselves a lower wage than the total distributions of the company. Reducing Social Security taxes from $21,000 down to, say, $11,000 could be $10,000 that owners would prefer to have today as opposed to decades away.
What You Are Paying For
In theory, each of your Social Security contributions is going towards the day when you start claiming benefits. In 2025, the rules allow people to start claiming benefits as early as 62 or wait until as late as 70. The longer you wait, the larger your monthly benefit. Many people who are ready for retirement, or perhaps already in retirement, may prefer to claim their benefits as soon as possible. Others may simply enjoy the option of taking their benefits for as long into their 60s as they see fit. There is no perfect way to start social security benefits. It will depend on your specific circumstances and retirement plans.
Most of Social Security’s calculations are based on the Full Retirement Age, which for most people is around 66 or 67 (for now, anyways). According to the Social Security website, for 2025, the maximum benefit for someone retiring at their full retirement age is $4,018. Interestingly, for those starting at 62, the monthly benefit drops to $2,831. Those who wait until 70 can max out at $5,108. Roughly, every year that benefits are delayed can increase the monthly benefit by around 7%.
Logically, the way to maximize your social security benefits is to hit the wage base for 35 working years of life, then start benefits at age 70, and live the longest life possible. While the first two parts are hard enough, living as long as possible is definitely the key. Those who pass in their 60s or 70s lose out on all the “remaining” social security they paid into but never received. For those whose family generally lives until the late 80s or 90s, delaying Social Security can be the move. Still, depending on the investment, the likelihood of recouping all that was paid in is low, assuming you had invested the taxed amount instead.
What Can You Do About It
It is likely, especially if you are closer to or above the wage base, that you will never fully get out of social security what you paid in. While results could vary widely, a reasonable expectation of saving $10,000-$20,000 per year, with the wonder of investing and compounding interest, could grow to millions in a retirement account over 2-3 decades. Those who receive $40,000-$60,000 each year and “only” claim Social Security benefits for a decade or two will still not break even.
Since the Social Security tax is a tax, there is not much that can be done from year to year. However, it is important as you get closer to full retirement age to keep tabs on the potential benefits you could receive. Having a rough expectation of how much you may receive each month can definitely help you plan for your cash flow into retirement years. Even the Social Security Administration points out that these benefits should not be your only source of retirement income, but it is still important to understand how much you could receive.
Self-employed individuals and business owners who can control their income have slightly more flexibility than most when it comes to Social Security. Especially for those who do not view Social Security as the primary means of income in retirement, it may make sense not to maximize Social Security, even if they could. Mentioned briefly earlier, many owners who elect the S-Corp status and pay themselves a wage fit into this category. W2 wages for an owner can reduce their overall self-employment taxes, which include Social Security. This is usually a calculated risk to reduce future social security in the future in exchange for less taxes today (or more cash today). Check with an accountant to see if this strategy could work for your situation.
Socially Secure
Ultimately, Social Security is a social program designed to help Americans retire with a decent income. It is effectively an annuity that you buy each year of your working life and then receive payments from retirement until you pass. There are ways to personalize it, but the most important part is to remain aware of your potential benefits. If you are unsure what your current potential benefits look like, now is the time to explore them.
TC Falkner 