Social Security Tax Repealed, But High Earners Face New $250k Cap and Complex Multi-Job Tax

The “You Earned It, You Keep It Act” is a major overhaul of how Social Security benefits are taxed and funded. The biggest headline is that it kills the federal income tax on Social Security benefits entirely, starting after the law is signed (SEC. 2). If you’re currently retired and paying taxes on your benefits, this means more money in your pocket immediately. Crucially, the bill ensures the Social Security trust funds don't lose a dime from this tax repeal by automatically appropriating funds from the general budget to cover the shortfall, dollar for dollar (SEC. 2).

The Tax on Your Benefits is Gone

For current and future retirees, this is a clear win. Currently, depending on your total income, up to 85% of your Social Security benefits can be subject to federal income tax. This bill eliminates that tax burden completely for future tax years. Think of it as an instant, permanent raise for anyone currently paying that tax. For example, if you’re a retired teacher whose pension and Social Security pushes you into the taxable bracket, that tax liability just vanishes. This change is funded by the general taxpayer, shifting the cost of funding Social Security away from benefits taxation and onto the general fund—meaning it’s coming from other federal tax revenue.

New Rules for High Earners: The $250K Ceiling

Starting in 2026, the bill dramatically changes the payroll tax structure for high earners (SEC. 3). Currently, Social Security (OASDI) taxes stop once you hit the annual maximum contribution and benefit base (which is currently around $168,600). This bill first eliminates that existing cap, but then immediately establishes a new cap of $250,000. If you earn more than $250,000 from one employer, you stop paying the Social Security tax on income above that threshold. This creates a donut hole: earnings between the old cap (say, $170,000) and the new cap ($250,000) will now be taxed, but earnings above $250,000 are tax-free.

The Multi-Job Headache

If you’re a high earner with multiple jobs—say, a consultant who earns $150,000 from Company A and $150,000 from Company B—the bill introduces a complex new tax mechanism to ensure you pay the full Social Security tax up to the $250,000 limit (SEC. 3). Since each employer only taxes you up to $250,000, and your combined income is $300,000, you would have overpaid under the old system and gotten a refund. Under this new rule, you won't get a refund credit unless the tax you already paid is higher than the amount calculated under this new rule. Essentially, the IRS will reconcile your total wages above $250,000 and impose a new tax to ensure the government collects the Social Security tax on your total income up to that $250,000 threshold, which will be treated like an estimated tax payment. This adds significant complexity for compliance and tax filing for those juggling multiple high-income roles.

Higher Benefits for Top Earners, But No SSI Penalties

For those who earn above the $250,000 threshold, this bill also changes the future benefit formula (SEC. 4). Currently, only income up to the annual cap is used to calculate your retirement benefit. Starting in 2026, the bill includes 2% of your “excess average indexed monthly earnings”—that is, earnings above $250,000—into your benefit calculation. This means high earners will see a slight increase in their future Social Security benefits, as some of their highest income will now count toward the benefit base. Importantly, the bill includes a protection for recipients of needs-based programs like SSI, Medicaid, and CHIP: any increased Social Security benefit resulting from this new formula won't count as income when determining their eligibility or benefit amount for those programs, ensuring low-income individuals aren't penalized (SEC. 4).