Social Security Tax Repeal for Retirees Paired with Complex New $250K Payroll Tax Rules Starting 2026

The Double-Edged Sword: What the Bill Actually Does

The “You Earned It, You Keep It Act” is making two massive changes to Social Security. First, and most immediately impactful for current retirees, it completely ends the federal income tax on Social Security benefits. If this becomes law, starting the year it’s enacted, your benefits will no longer be counted as gross income for federal tax purposes (SEC. 2). Crucially, to prevent the Social Security Trust Funds from losing that tax revenue, the bill mandates that the U.S. Treasury automatically appropriate general funds to replace the exact amount of money lost. This keeps the Trust Funds whole but shifts the funding burden directly onto the general taxpayer.

Goodbye Tax, Hello Complexity: The $250K Payroll Tax Maze

The second major shift is how we fund Social Security for high earners, kicking off in 2026. Right now, there’s a cap (the Contribution and Benefit Base) on how much of your income is subject to the 6.2% Social Security payroll tax. This bill essentially gets rid of that cap, but in a very complicated way (SEC. 3). For wages paid after 2025, if you earn more than the standard cap but less than $250,000, those earnings are not taxed. However, any earnings above $250,000 are again subject to the Social Security tax. This creates a strange ‘donut hole’ in the taxation system.

This new structure is going to be a headache for anyone earning near or above $250,000, especially if they have multiple jobs or are self-employed. For instance, if you’re a consultant or a high-level contractor working for three different companies, the bill introduces a new mechanism (SEC. 3, Section 3103) requiring you to pay a special tax at the end of the year to settle up the difference between what was withheld by your various employers and what you actually owe under the new $250,000 threshold. For the average person, this means tax season just got a lot more complicated if you’re in that high-earning bracket, demanding more careful tracking and potentially increasing your final tax bill if your employers don’t coordinate perfectly.

The Real-World Impact: Retirees and Future Benefits

For current retirees, the tax repeal is a straight-up win, putting more money back in their pockets instantly. This is a big deal for the millions of seniors who currently pay federal tax on up to 85% of their benefits. If you’re living on a fixed income, eliminating that tax liability is like getting a substantial, immediate raise.

For future retirees, the bill also changes the benefit calculation formula (SEC. 4). Starting with those who become eligible after 2025, the Social Security Administration will add a small bonus—2%—to your Primary Insurance Amount (PIA) based on the income you earned above $250,000. While this is a small increase, it’s designed to ensure that those who pay into the system above the new high-earner threshold actually see a return on those contributions. Crucially, the bill protects access to safety net programs: if your Social Security check goes up because of this 2% bonus, the government is required to ignore that increase when determining your eligibility for programs like Supplemental Security Income (SSI), Medicaid, or CHIP, preventing you from being phased out of necessary assistance.

The Fiscal Trade-Off: Who Pays?

The biggest challenge here isn't the benefit increase or the tax repeal—it’s the funding mechanism. By requiring the Treasury to backfill the Social Security Trust Funds using general revenue (SEC. 2), the bill removes a dedicated funding source (the tax on benefits) and makes the Trust Funds dependent on annual appropriations from Congress, which are funded by general taxpayers. This shifts the financial risk from a dedicated payroll tax structure to the broader federal budget, potentially setting up future political fights over whether to fully fund the Trust Funds. While the language mandates the appropriation, relying on the general fund for Social Security funding is a major structural change that could create long-term solvency concerns if future Congresses decide to reduce or neglect the required annual payments.