"You Earned It, You Keep It Act" Ends Social Security Tax, Lifts Payroll Tax Cap Above $250K After 2025

This bill, the "You Earned It, You Keep It Act," tackles Social Security from two main angles. First, it aims to immediately stop the federal government from taxing Social Security benefits by repealing Section 86 of the Internal Revenue Code. Second, starting after 2025, it significantly changes how Social Security taxes are collected from higher earners and adjusts how future benefits are calculated for them.

Your Social Security Check: Tax-Free Soon?

The most immediate potential change is for current and future Social Security recipients. Section 2 of the bill strikes the part of the tax code (Section 86) that makes Social Security benefits taxable income for many people. If this passes, the amount you see on your Social Security statement would be the amount you actually keep, without a portion being taxed by the federal government. This applies to taxable years starting after the bill is enacted. Worried about how this affects Social Security's funding? The bill directs the government to transfer funds from general revenues into the Social Security and Railroad Retirement trust funds each year to make up for the lost tax revenue, ensuring the funds are kept whole from this specific change.

The Paycheck Shift: Who Pays More Starting After 2025?

Here's where things change for workers, particularly higher earners, down the road. Currently, you only pay Social Security taxes on your earnings up to a certain limit each year (the "contribution and benefit base," which changes annually). Section 3 of this bill changes that rule for earnings above $250,000, effective for calendar years after 2025.

Under the new rules:

• If the annual contribution base is less than $250,000, any wages you earn above $250,000 will also be subject to Social Security tax.
• If the annual contribution base exceeds $250,000, the bill effectively removes the cap entirely for earnings above that base.

What this means in practice: If you earn, say, $300,000 in 2026, you'd pay Social Security tax on the amount up to the standard cap plus on the income between $250,000 and $300,000 (assuming the cap is below $250k). If the cap itself rises above $250k, you'd pay tax on all earnings above that higher cap. This applies to both wages and self-employment income. The bill also adds rules (in a new Internal Revenue Code Section 3103) for handling this correctly if you have multiple jobs.

A Small Bump for Future High-Earner Benefits?

Paying more in taxes often means getting more in benefits later, right? Section 4 adjusts the Social Security benefit formula, but only slightly, and only for those becoming eligible for retirement or disability benefits after 2025. Currently, benefits are calculated based on your average indexed monthly earnings (AIME) up to the tax cap. This bill adds a new wrinkle: it includes 2% of your average earnings above the contribution and benefit base (or $250,000, whichever is higher post-2025) into your primary benefit calculation. So, while high earners will pay significantly more in taxes under Section 3, Section 4 provides a relatively small increase in their future potential Social Security benefits based on those higher taxed earnings.

Keeping Other Benefits Stable

One important detail in Section 4: even if this new benefit calculation results in a technically higher Social Security income figure for some high earners, that higher amount won't be used when determining eligibility for other needs-based programs like Supplemental Security Income (SSI, Title XVI), Medicaid (Title XIX), or the Children's Health Insurance Program (CHIP, Title XXI). For those programs, your Social Security income will be considered based on the old calculation rules. This prevents someone from losing eligibility for essential aid simply because the Social Security formula changed on paper.