You can't overstate how important Social Security's financial safety is for millions of American retirees. Having that guaranteed income in retirement brings stability and peace of mind to many, making Social Security one of the country's more important social programs.
With all the good Social Security does for Americans, this money doesn't just come out of thin air. It's a byproduct of millions of people paying Social Security payroll taxes throughout their careers. Not everyone has to pay these taxes, however; some workers are exempt.
Let's see who fits into that category and what it could mean for their retirement planning.
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How Social Security taxes work
Social Security payroll taxes are collected under the Federal Insurance Contributions Act ( FICA ). This tax is 12.4%, split evenly between employers and their employees at 6.2% each. Self-employed workers are responsible for both the employer and employee portions of the tax, so they pay the full 12.4%.
The good news is that not all income is subject to Social Security payroll taxes -- it's only up to a certain amount, called the "wage base limit." The wage base limit in 2024 is $168,600, so any income above that is not subject to Social Security taxes.
It's important to note that the wage base limit typically increases yearly (with a few exceptions), so someone could pay more Social Security taxes in some years than others. For perspective, here are the past five wage base limits before this year:
| Year | Wage Base Limit |
|---|
| 2023 | $160,200 |
| 2022 | $147,000 |
| 2021 | $142,800 |
| 2020 | $137,700 |
| 2019 | $132,900 |
Data source: Social Security Administration.
The money collected through Social Security payroll taxes is used to pay benefits to current retirees receiving Social Security benefits. It's a cycle where current workers pay for current retirees with the expectation that they'll be on the receiving end when they retire.
Not all workers have to pay Social Security payroll taxes
Most American workers are required to pay Social Security payroll taxes, but there are some notable exemptions.
Student workers
Students who attend school full-time, with the school offering part-time work contingent on the student staying eligible and enrolled, are exempt. This exemption also applies to students with work-study jobs. It does not apply to students who work off-campus, however.
Certain religious groups
Members of certain religious groups (such as the Amish and Mennonites) can apply for a Social Security tax exemption if their religious beliefs oppose participating in government programs like Social Security. When this happens, they must also waive their right to other Social Security Act benefits, such as hospital insurance benefits.
State and local government employees
Some state and local government employees who are covered under a public retirement plan aren't subject to Social Security payroll taxes.
Foreign government employees
Foreign teachers, scholars, professors, teachers, trainees, researchers, physicians, non-students, and similar workers temporarily present in the U.S. are exempt from Social Security payroll taxes on wages paid to them for services performed within the U.S.
People with income limitations
You're exempt from Social Security payroll taxes if you're self-employed and earn less than $400. For those earning above that, the amount subject to self-employment tax is 92.35% of your net earnings from self-employment.
What to do if you're exempt from Social Security payroll taxes
Not paying Social Security taxes means not receiving Social Security (or Medicare ). That makes it especially important to plan your retirement finances ahead to ensure you're not left out to dry and have a good financial foundation in your golden years.
If you have access to a pension, make it a priority to contribute as much as possible without jeopardizing your livelihood. If you have a 401(k), ensure you're putting a healthy amount aside and taking advantage of perks like employer matches .
For those without access to either, retirement accounts like IRAs can be great options. Their relatively low contribution limits make it harder for them to act as primary retirement accounts, but any bit helps, and they can grow to respectable amounts over time.
Being exempt from paying Social Security payroll taxes can save you money on the front end, but it can have major effects on the back end in retirement. Make sure you're aware and properly planning.
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