Understand payroll tax wage bases and limits
An employer uses the taxable wage base to calculate the correct amount of Social Security taxes to withhold from a paycheck. It can also be used in other cases, such as to determine some state unemployment taxes, other state-specific taxes, or an employer’s federal unemployment tax withholdings. The taxable wage base is the amount of an employee’s income from which the IRS calculates an individual’s tax liability for Social Security. In other words, the taxable wage base is the income an employee earns on which Social Security taxes must be paid.
However, some states (Alaska, New Jersey, and Pennsylvania) require employees to pay SUTA tax, too. If your state requires employee SUTA contributions, withhold the tax from their wages. Each state sets its own SUTA tax rate and wage base, so be sure to check with your state for more information.
The taxable wage base is also known as the Social Security wage base. Because Social Security provides a progressive benefit formula and stops taxation at the SSWB, pension plans may integrate benefits or contributions according to a wage base, frequently at a fraction (e.g. 50%) of the SSWB. The amount over the taxable wage base of $62,500 ($500 in the example) is considered excess wages. Excess wages are reported (for unemployment-insurance benefits purposes), but are subtracted from the employee’s total wages, so they do not pay taxes on the amount above the taxable wage base ($62,500 in 2021).
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.
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. Stay on top of your payroll wage bases and limits for federal or state taxes with QuickBooks payroll product. A taxable wage base works by identifying a dollar amount beyond which an individual can no longer be taxed for certain taxes, such as the OASDI tax. Other taxes, such as Medicare payroll taxes, are based on an uncapped percentage of income, so you’ll pay Medicare taxes no matter how much you earn.
You must pay your state’s unemployment tax rate on each employee’s wages until they earn above the wage base. Taxable wage base amounts can vary based on the type of tax and jurisdiction. For Social Security taxes, most years, as the cost of living goes up, the Social Security Administration provides an adjustment that slightly raises the maximum amount that these taxes are based on. The taxable wage base for OASDI taxes means you and your employer pay taxes on money up to that threshold and none after that. The taxable wage base applies to FUTA (Federal Unemployment Tax Act) only when a state unemployment agency uses it to calculate the amount of unemployment taxes to be withheld from an employee’s paycheck. An employee’s taxable wage base is reported on their W-2 form (the Wage and Tax Statement) each year.
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. 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 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. To update the wage base limit see download the latest payroll updates. Plans can contribute a higher percentage to base salaries above an integration base.
In Georgia, however, this taxable wage base is only $9,500. For unemployment insurance, the Federal Unemployment Tax Act (FUTA) has a taxable wage base of $7,000. Employers pay taxes on the first $7,000 in earnings per employee. States then can have varying levels in terms of what they set as the taxable wage base for unemployment insurance. A taxable wage base generally refers to the maximum income amount on which certain taxes are based on, particularly Social Security taxes or an employer’s share of taxes that go toward unemployment insurance. 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.
Lost your job? Apply for Unemployment Benefits today.
To avoid overwithholding and overpaying taxes, you must be mindful of which taxes have a wage base. Some states keep the same base for several years, whereas others tend to make annual adjustments. In Washington, for example, the taxable wage base stems from annual average wage calculations. So, as the average salary increases, the taxable wage base does, too. The taxable wage is determined by subtracting any non-taxable wages, deductions, and employer-provided benefits from the gross wage. Employers, find what you need to understand and meet your unemployment insurance obligations.
If you do very well and increase your earnings above the annual threshold for the year, you wouldn’t pay the OASDI portion of self-employment taxes above that amount. Yet any earnings above that taxable wage base would not incur additional OASDI taxes. Someone could earn $1 million in 2023, but they still pay the same amount of Social Security taxes as someone earning $160,201.
Unemployment Rate for May 2023
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. 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.
If that integration base is identical to the SSWB the contributions may be double above the base not to exceed 5.7% for excess plans. For offset plans the defined-contribution plan may base contributions on total base salary and then reduce or “offset” the contribution rate for salary below the integration base. If the integration base for such offset plans is identical to the SSWB, then the reduction could be up to 5.7%.
- Other taxes, such as Medicare payroll taxes, are based on an uncapped percentage of income, so you’ll pay Medicare taxes no matter how much you earn.
- For example, if you’re self-employed and figuring out your estimated taxes, you would want to know if the taxable wage base affects how much you’ll pay in self-employment taxes.
- It is also the maximum amount of covered wages that are taken into account when average earnings are calculated in order to determine a worker’s Social Security benefit.
- You can receive a tax credit up to 5.4%, reducing your FUTA tax rate to 0.6%.
If you’re asked to log in with an OHID – the state’s best-of-breed digital identity – your privacy, data, and personal information are protected by all federal and state digital security guidelines. In addition to FUTA tax, you must pay state unemployment (SUTA) tax. The maximum FUTA tax amount you can contribute per employee is $420 ($7,000 X 6%). If you qualify for the maximum tax credit of 5.4%, the most you will pay per employee is $42 ($7,000 X 0.6%).
Like the taxable wage base for Social Security, the unemployment tax basis increases every year or every few years, depending on the state. While you can’t personally modify wage base limits, you do need to update them every year if you use QuickBooks Desktop. Note that although self-employed individuals pay 12.4%, this is mitigated two ways.
How Taxable Wage Bases Work
That’s because, unlike income taxes, for example, some types of taxes do not apply above certain thresholds. If your state doesn’t determine FUTA taxes by an employee’s taxable wage base (which is most states), the tax applies only to the first $7,000 an employee is paid during the year. That’s the 2020 tax year rate so you may need to look up the current rate for your year. The taxable wage base applies to Social Security taxes because the amount of Social Security taxes withheld from each paycheck is determined by the employee’s taxable wage base. 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. 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.
- If you’re asked to log in with an OHID – the state’s best-of-breed digital identity – your privacy, data, and personal information are protected by all federal and state digital security guidelines.
- In other words, the taxable wage base is the income an employee earns on which Social Security taxes must be paid.
- The following are two examples of the taxable wage base and how Social Security taxes are calculated.
- Whatever your employer pays in taxes could potentially affect what they end up paying you in terms of your salary, so you might want to consider things like different tax rates in different states.
- Before calculating how much to withhold and contribute, you need to know about the tax wage base.
Wage base limits are the maximum amount of an employee’s wages that are subject to taxes per year. Once a yearly limit has been met for a specific tax, the employee doesn’t pay any more of that tax through the end of the year. This applied to employees whose Social Security wages for a biweekly pay period were less than $4,000. The Social Security tax is one component of the Federal Insurance Contributions Act tax (FICA) and Self-employment tax, the other component being the Medicare tax.
Related to Wage Base
Factors like experience, prior unemployment claims, and your industry influence your SUTA rate. If you’re an employer, you likely know that withholding, contributing, and remitting employment taxes is essential to running legal and accurate payrolls. Before calculating how much to withhold and contribute, you need to know about the tax wage base. In the context of the OASDI taxable wage base, your gross wages are what you earn before taxes, and your taxable wage is what you earn up to $160,200. For example, if you’re self-employed and figuring out your estimated taxes, you would want to know if the taxable wage base affects how much you’ll pay in self-employment taxes.
Generally speaking, an employee’s taxable wages are the same as an employee’s gross income (also called gross wage or gross pay) that is subject to taxation. However, there are some times when the taxable wage base is a different amount than the gross income. While the taxable wage base is the point from which Social Security taxes are calculated, the gross income is the point from which all deductions are made.