DEFINITION of 'Taxable Wage Base'

The taxable wage base is the maximum amount of earned income that employees must pay Social Security taxes on. Generally, the employee's gross wages will be equal to the taxable wage base. Typically, an employer will handle this calculation and withhold the correct amount of taxes from each of the employee's paychecks; however, the employee is still responsible for reporting the tax.

The taxable wage base is also known as the Social Security wage base.

BREAKING DOWN 'Taxable Wage Base'

Social Security tax is not applied on wages, salaries, and bonuses in excess of the stipulated maximum amount of wages that is subject to Social Security taxes. As of 2018, the Social Security tax rate is 12.4%. Half of the tax is paid by the employer, and the employee is responsible for paying the other half, that is 6.2%. The maximum amount of income that taxpayers must pay Social Security tax on is $128,400. In other words, the taxable wage base is $128,400.

Consider an employee, Rob, who earns $85,000 in gross income for the tax year 2018 and has a 6.2% Social Security tax withheld from his pay. The federal government, in effect, will collect 6.2% x $85,000 = $5,270 from Rob to help fund retirement and disability benefits for retirees. In some instances, an employee will earn wages that can be classified as excess wage. The excess wage can be subtracted from gross income so that the taxable wage base is lower than gross income. For example, assume another employee, Sue, earns $175,000 gross income. The Social Security tax rate will only be applied up to the taxable wage base of $128,400, which is less than her gross income. Therefore, Sue will pay 6.2% x $128,400 = $7,960.80 as her contribution to the country’s Social Security account for retirees and the disabled.

Taxable wage base is most often used in reference to Social Security taxes, though it can apply to any income-based tax. For example, some state unemployment agencies use a taxable wage base to calculate unemployment taxes. In California, the taxable wage base (as of 2018) is $7,000, Ohio - $9,500, Pennsylvania - $10,000, New York - $11,100, Connecticut - $15,000, Oklahoma - $17,600, Wyoming - $24,700, Nevada - $30,500, Hawaii - $45,900, etc. Refer to the American Payroll Association website for the unemployment insurance taxable wage base for all states.

The taxable wage base for Social Security and Unemployment taxes increases every year or every few years. Note that although Social Security tax is applied up to the taxable wage base, Medicare tax is applied on 100% of income.

RELATED TERMS
  1. Wage Push Inflation

    Wage push inflation is a general increase in the cost of goods ...
  2. Taxable Event

    A taxable event refers to any event or transaction that results ...
  3. Social Security Tax

    The tax levied on both employers and employees to fund the Social ...
  4. Maximum Wage

    A maximum wage is a ceiling imposed on how much income a worker ...
  5. IRS Publication 525 - Taxable And ...

    Publication 525 is a document published by the IRS detailing ...
  6. Minimum Wage

    The minimum wage is a legally mandated price floor on hourly ...
Related Articles
  1. Taxes

    How Fixed Income Threshold Reduces Social Security Benefits

    The use of fixed income threshold amounts to an ongoing tax increase and a means test on Social Security beneficiaries. Here's how.
  2. Taxes

    Small Business Tax Obligations: Payroll Taxes

    Don't leave it up to your accountant - owners are ultimately responsible for fulfilling tax obligations.
  3. Retirement

    Avoid the Social Security Tax Trap

    Government benefits can cost you big money! Know the income thresholds before you file.
  4. Retirement

    When Do I Stop Paying Social Security Tax?

    Here's a look at how one almost never stops paying social security to tax, unless you belong to one of these special groups.
  5. Insights

    Will You See Higher Wages In 2015?

    It's been a few years into the economic recovery from the Great Recession, and the employment picture has been rocky.
  6. Personal Finance

    Minimum Wage: Good Cause Or Economic Pariah?

    Here are some positives and negatives to help you decide where you stand on the minimum wage debate.
  7. Insights

    Why $15 Minimum Wage Might Not Be Good News for Anyone (MCD, DPZ)

    Discover why the minimum wage isn't the panacea it is made out to be, and how artificial wage increases strain businesses and consumers.
  8. Personal Finance

    How Minimum Wage Impacts Unemployment

    We explain how the minimum wage affects unemployment, public assistance, and the economy overall.
  9. Retirement

    Understanding Your FICA Payments

    The Federal Insurance Contributions Act is a U.S. law that requires a paycheck deduction be paid to Social Security and Medicare.
  10. Taxes

    Have Household Help? Don't Get In Tax Trouble

    Hiring household workers can be a complicated process. Know what the government requires so you can prevent penalties and problems down the road.
RELATED FAQS
  1. How is Social Security tax calculated?

    Were you ever confused about your social security tax? Find out how it is calculated, including the impact of the Medicare ... Read Answer >>
Trading Center