What Is the Taxable Wage Base?
The term taxable base refers to the maximum amount of earned income on which employees must pay Social Security taxes. The employee's gross wages are generally equal to the taxable wage base. An employer typically handles this calculation and withholds the correct amount of taxes from each of the employee's paychecks. Meanwhile, the employee is still responsible for reporting the tax on their tax return each year. The taxable wage base is also known as the Social Security wage base.
- The taxable wage base is the maximum amount of earned income on which employees must pay Social Security taxes.
- The taxable wage base is also known as the Social Security wage base.
- The maximum amount of income that taxpayers must pay Social Security tax on is $147,000 in 2022 and $160,200 in 2023.
- Half of the Social Security tax is paid by the employer, while half is paid by the employee.
- Some state unemployment agencies use a taxable wage base to calculate unemployment taxes.
Understanding the Taxable Wage Base
The Social Security tax rate is 12.4%. Half of the tax, which comes to 6.2%, is paid by the employer, and the employee is responsible for paying the other half through payroll deductions. But Social Security tax is applied to earnings only up to a certain limit. Wages, salaries, and bonuses in excess of the stipulated maximum amount of earnings are not taxable. The limit adjusts annually, pegged to changes in the national average wage index.
The maximum amount of income that is subject to Social Security taxes is $147,000 in 2022 and $160,200 in 2023. This means that you don't pay Social Security taxes on any amount over these thresholds. The Social Security tax is deducted from individuals' payroll automatically along with the Medicare tax. Keep in mind that although the Social Security tax is applied up to the taxable wage base, the Medicare tax of 2.9% has no such limit. Therefore, it is applied to 100% of an employee's income.
An employee's taxable wage base is reported on their W-2 form (the Wage and Tax Statement) each year. Employers prepare the W-2s annually, sending copies to both the Internal Revenue Service (IRS) and the employee. Box 3 ("Social security wages") on the 2022 form essentially gives your taxable wage base, detailing how much of an individual's earnings are subject to Social Security tax. Box 4 indicates the amount of Social Security tax withheld.
If you're self-employed, you're responsible for paying the employee and employer's portion of the Social Security and Medicare tax to the IRS.
The taxes that are taken out of Social Security wages go to fund the Social Security payments that millions receive each month. The best-known of these is the retirement benefits paid to those 65 years old and up. Here's a snapshot of how many individuals receive each different benefit through the Social Security program as of June 2022:
- About 48 million of these retired workers and an additional 2.8 million dependents received an average of $1,669 each month.
- As many as 7.8 million disabled workers and their 1.3 million dependents also receive Social Security benefit checks averaging $1,362 per month.
- Survivors of deceased retired or disabled workers are entitled to all or some benefits. There are 5.9 million Americans in this group, receiving a collective $7.8 billion.
Social Security tax and Medicare tax are collectively known as Federal Insurance Contributions Act (FICA) taxes. The 7.65% of gross income that an employee pays toward them appears as FICA taxes on their paystub and on their annual W-2 form.
Taxable Wage Base and Unemployment Tax
A taxable wage base is most often used in reference to Social Security taxes, though it can also apply to any income-based tax. For example, some state unemployment agencies use a taxable wage base to calculate unemployment taxes. The following is a list of taxable wage bases to calculate unemployment insurance in 2023 in several states:
- Alaska: $47,100
- California: $7,000
- Florida: $7,000
- Kentucky: $11,100
- Nevada: $40,100
- New York: $12,300
- Ohio: $9,000
- Pennsylvania: $10,000
- Wyoming: $29,100
Like the taxable wage base for Social Security, the unemployment tax basis increases every year or every few years, depending on the state.
In some instances, an employee earns wages that are classified as excess wages. The excess wage can be subtracted from gross income so that the taxable wage base is lower than gross income.
Taxable Wage Base Exemptions
Not every part of an individual's income is considered taxable. As such, even if they are included in a paycheck, some common types of compensation are exempt from the taxable wage base, either completely or within limits. They include:
- Payments to partners of a partnership
- Disabled worker wages
- Workers' compensation benefits
- Compensation paid to family employees who are minors
- Life insurance coverage
- Business travel expenses
- Assistance for dependent care, education, retirement planning services
- Payments to certain non-employees
- Tips under $20 a month
The COVID-related Tax Relief Act of 2020 deferred the due date for the withholding and payment of the employee share of Social Security tax on Q4 wages until the period beginning on Jan. 1, 2021, and ending on Dec. 31, 2021. This applied to employees whose Social Security wages for a biweekly pay period were less than $4,000.
Examples of Taxable Wage Base
The following are two examples of the taxable wage base and how Social Security taxes are calculated. We've used the 2022 taxable wage base.
Let's say Rob earns $85,000 in gross income and has a 6.2% Social Security tax withheld from his pay. The federal government, in effect, will collect $5,270 (6.2% x $85,000) from Rob to help fund retirement and disability benefits for retirees.
Now let's look at Sue's situation. Suppose she earns $175,000 gross income. The Social Security tax rate will only be applied up to the taxable wage base of $147,000, which is less than her gross income. Therefore, Sue will pay $9,114 (6.2% x $147,000) as her contribution to the country’s Social Security account for retirees and the disabled.
What Is the FICA Tax?
Short for Federal Insurance Contributions Act taxes, the FICA tax is a duty imposed on wages and earnings. Constituting 7.65% of the employee's gross pay, it actually consists of two separate taxes: Social Security (6.2%) and Medicare (1.45%). The employee and the employer each contribute half of the FICA tax, which is taken out of every paycheck.
How Is Social Security and Medicare Taxed for Self-Employed Individuals?
Self-employed individuals (independent contractors, sole proprietors, etc.) must pay both halves of Social Security and Medicare taxes—the entire 15.3% FICA tax. It is paid on the net income of their business, or the sum of their self-employed earnings after expenses and losses are deducted. While the Social Security and Medicare tax rate is the same as for employees, the self-employed can take a deduction for half the amount on their tax returns.
Does Social Security Count as Income?
Yes, for most people, Social Security does count as income, and is, therefore, subject to income taxes. More specifically, it counts as unearned income. Whether you actually pay taxes on it, however, depends on your overall gross income. In 2023, up to 50% of Social Security income is taxable for individuals with a total gross income of at least $25,000, or couples filing jointly with a combined gross income of at least $32,000. Up to 85% of Social Security benefits are taxable for an individual with a combined gross income of at least $34,000, or a couple filing jointly with a combined gross income of at least $44,000. (These sums include your benefit payments.)
At What Age Is Social Security No Longer Taxed?
Your Social Security benefits could theoretically be tax-free once you reach full retirement age, which is around 66 or 67, depending on your year of birth. But that's only if they're your sole source of income. More specifically, if your overall gross income is $25,000 or above ($32,000 if married filing jointly), they are taxable, at your ordinary income tax rate.