The Social Security Paycheck Bonus

This year I’ve finally made enough money to reach the Social Security contribution cutoff. The Social Security paycheck bonus occurs when an individual makes more than $127,200 per year. Any income beyond this amount no longer has taxes taken out for Social Security. New attendings who scrutinize their paycheck may notice a nice bump up in the take home pay when this threshold is reached. This is because if employed, 6.2% of each paycheck will be allocated to Social Security up until $127,200. This continues until January 1 of the following year when pay resets, giving a noticeable 6.2% bump in pay I like to call the Social Security paycheck bonus.

How The Social Security Paycheck Bonus Works

Depending on how much you earn, you might not pay Social Security taxes on all of your income. Each year the government sets a cap on income that is subject to tax for Social Security.

In 2017, the cap is $127,200.

While in residency, most residents never pass this threshold and never get the “Social Security Bonus.”

After graduation and income increases, many attendings will find themselves hitting this threshold. Any earnings on income over $127,200 are not subject to Social Security tax for individuals who are paid as an employee.

Self Employed Physicians

For physicians who are paid as independent contractors or are self employed, the calculation is a little different. Employees have the benefit of their employer paying half of the Social Security taxes on income. Self employed individuals are responsible for the entire 12.4%.

The same maximum limit applies to self employed physicians of $127,200. Instead of paying $7,886.40 like an employee would, a self employed physician will pay $15,772.80 per year.

The Government Has Been Raising The Bar

This year the government raised the gross salary cutoff where an individual will no longer pay any Social Security taxes. Last year, the cutoff was $118,500. This year it jumped to $127,200.

With an estimated $11 trillion dollar shortfall, the Social Security administration has come under a lot of scrutiny in the past decade. Figuring out how to fund the program will be difficult with such a large shortfall without decreasing benefits, increasing taxes, or both.

Expect the government to continue to move the line of where Social Security taxes are no longer being paid on income.

Using The Social Security Bonus

This income is what I would describe as unexpected since the government could change the goalpost at any given time. I plan on using the Social Security paycheck bonus to more quickly grow my net worth. The amount I put in my taxable account will increase by the same amount, 6.2%. I effectively will have no plan to increase spending with this bonus.

If I decided to put the extra money towards my student loans, I could payoff my loans  almost 1 year earlier. Not a bad bonus at all.

Instead, I plan on investing it directly in the market. I am fortunate to have a low interest rate on my student loans and have been lucky to benefit from making money on returns in the market. 

Before making this post, I asked my colleagues what they were planning on doing with their bonus since I estimated they have already hit this threshold. Not surprisingly, only one person even knew this threshold even existed. Almost no one even looked at the details of their pay stubs to understand where exactly money was going. Some mentioned they planned on spending the additional cash on a new car or a jacked up golf cart to ride through their neighborhood. To each their own, but I worked hard for my money and I want my money to work for me.

What do you do with your Social Security bonus once you pass the $127,200 mark?