Taxable Wage Base Definition

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Taxable Wage Base Definition

What Is the Taxable Wage Base?

The greatest amount of earned income on which workers must pay Social Security taxes is known as the taxable wage base. In most cases, the employee’s gross pay will match the taxable wage base. An employer would often manage this computation and withhold the appropriate amount of taxes from each employee’s paycheck; however, the employee is still responsible for reporting the tax on their tax return each year. The Social Security wage base is another name for the taxable wage base.

Key Takeaways

  • The greatest amount of earned income on which workers must pay Social Security taxes is known as the taxable wage base.
  • The Social Security wage base is another name for the taxable wage base.
  • The highest amount of income on which taxpayers must pay Social Security tax in 2022 is $147,000.
  • When it comes to Social Security taxes, the employer pays half while the employee pays the other half.
  • Some state unemployment offices compute unemployment taxes using a taxable wage basis.

Understanding the Taxable Wage Base

The rate of Social Security taxation is 12.4%. The company pays half of the tax, which amounts to 6.2%, and the employee is liable for the other half. However, the Social Security tax is only levied on wages up to a particular amount. Wages, wages, and bonuses in excess of the specified maximum earnings amount are not taxed. The limit is adjusted yearly in accordance with changes in the national average pay index.

$147,000

The 2022 taxable wage base—the highest amount of income subject to Social Security taxes.

Consider Rob, an employee with a gross salary of $85,000 and a 6.2% Social Security tax deducted from his wages. In fact, the federal government will take 6.2% x $85,000 = $5,270 from Rob to help pay retirement and disability benefits for seniors. In certain cases, an employee will receive earnings that qualify as excess wage. The excess pay may be deducted from gross income, resulting in a taxable wage base that is less than gross income.

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Assume another employee, Sue, gets $175,000 in gross income. The Social Security tax will be imposed only up to her taxable salary base of $147,000, which is less than her total income. As a result, Sue will contribute 6.2% x $147,000 = $9,114 to the country’s Social Security account for pensioners and the handicapped.

It is worth noting that, although the Social Security tax is applied up to the taxable wage base, the Medicare tax of 2.9% has no such cap; it is paid to 100% of income.

The Social Security and Medicare taxes are referred to together as Federal Insurance Contributions Act (FICA) levies. The 7.65% of gross income that an employee contributes to FICA taxes shows on their paystub and on their yearly W-2 form.

Unemployment Tax

A taxable wage basis is most often associated with Social Security taxes, although it may apply to any income-based tax. Some state unemployment offices, for example, compute unemployment taxes using a taxable wage basis. In 2021, the following taxable pay bases will be used to compute state unemployment insurance:

  • Alaska: $43,600
  • California: $7,000
  • Florida: $7,000
  • Kentucky: $11,100
  • New York: $11,800
  • Ohio: $9,000
  • Pennsylvania: $10,000
  • Wyoming: $27,300
  • Nevada: $33,400

The American Payroll Association maintains a list of the taxable pay base for unemployment insurance in each state.

The foundation for unemployment taxes, like the taxable salary base for Social Security, grows every year—or, in certain situations, every few years.

Taxable Wage Base Exemptions

Even though they are included in a paycheck, several typical sources of remuneration are totally or partially excluded from the taxable wage base. They are as follows:

  • Payments to a partnership’s partners
  • Disabled worker wages
  • Workers compensationbenefits
  • Compensation is provided to minor family workers.
  • Life insurance coverage
  • Business travel expenses
  • Assistance with dependent care, education, and retirement planning
  • Payments to some non-workers
  • Tips under $20 a month
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The COVID-related Tax Relief Act of 2020 postpones the due date for withholding and payment of the employee portion of Social Security tax on Q4 earnings until January 1, 2021, and ends December 31, 2021. This applies to workers whose Social Security earnings were less than $4,000 for a biweekly pay period.

How Is the Taxable Wage Base Reported?

Every year, an employee’s taxable pay base is disclosed on their W-2 form (the Wage and Tax Statement). Employers create W-2s on a yearly basis and provide copies to both the IRS and the employee.

Box 3, under “Social security earnings,” on the 2021 form, effectively offers your taxable salary base: It shows how much of your income was subject to Social Security tax. Box 4 shows the amount of Social Security tax withheld.

What Do Social Security Wages Fund?

The taxes deducted from Social Security income are used to support the monthly Social Security payouts that millions of people receive. The most well-known of them are the retirement benefits granted to persons aged 65 and higher. There were 46.7 million of these retired employees and an additional 2.9 million dependents as of June 2021, with an average monthly payout of $1,555.

A total of 8.1 million handicapped employees and their 1.4 million families get Social Security benefits, with monthly payments averaging $1,280.

Finally, survivors of dead retired or handicapped employees are eligible for full or partial payments. This group includes 5.9 million Americans who will get a total of $7.3 billion.

What Is the FICA Tax?

The FICA tax, which stands for Federal Insurance Contributions Acttaxes, is a levy levied on salaries and earnings. It is really two different taxes, totaling 7.65% of the employee’s gross pay: Social Security (6.2%) and Medicare (1.45%). Each employee and employer contribute half of the FICA tax, which is deducted from each paycheck.

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How Is Social Security and Medicare Taxed for Self-Employed Individuals?

Individuals who work for themselves (independent contractors, sole proprietors, and so on) must pay both halves of Social Security and Medicare taxes—the whole 15.3% FICA tax. It is based on their business’s net income, or the amount of their self-employment profits after costs and losses are removed. While the Social Security and Medicare tax rates are the same for workers, self-employed individuals may deduct half of the amount on their tax returns.

Does Social Security Count as Income?

Yes, for the vast majority of individuals, Social Security counts as income and is therefore subject to income taxes. It is explicitly considered unearned income. However, whether or not you pay taxes on it is determined by your whole gross income. Individuals having a total gross income of at least $25,000, or couples filing jointly with a combined gross income of at least $32,000, will be allowed to deduct up to 50% of Social Security income in 2021. For a person 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, up to 85% of Social Security payments are taxed. (Your benefit payments are included in these figures.)

At What Age Is Social Security No Longer Taxed?

In theory, if you reach full retirement age (66-67, depending on your birth year), your Social Security income may be tax-free. But only if they are your only source of income. They are taxed at your regular income tax rate if your total gross income is $25,000 or more ($32,000 if married filing jointly).

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