Taxable Wage Base

Being an employer comes with a lot of responsibilities. If you are an employer, one of the most important things that you have to do is about payroll taxes. How much do you withhold? What are the taxes required? Yes, it may be overwhelming at times with all the guidelines and numbers and rules. However, it’s just one of those things that you have to face head on. Although there is numerous payroll software that can help you with employment taxes, understanding the basics is always an advantage. Do you know what taxable wage base is? Let’s find out below. 

What is the meaning of Taxable Wage Base? 

When we say taxable wage base, we are referring to the amount of an employee’s income that can be taxed per year. It is the maximum amount of earnings of an employee from which they must pay Social Security taxes on. Because of this, the taxable wage based is also sometimes called the Social Security wage base. 

Why is it important? 

Determining the taxable wage base is important because it is the amount from which the Internal Revenue Service (IRS) computes how much an employee’s Social Security tax is. Additionally, taxable wage base is also used in determining withholdings for federal and state unemployment taxes. 

Typically, the taxable wage base of an employee is the same as gross income. When we say gross income of an individual, this is the money that the individual earns in a specific period that is subject to taxation. Gross income includes all income from various sources of earned and unearned income Earned income are those that come from wages, tips, and salary. Unearned income come from sources such as interest earned via investments, royalties, dividends, disability insurance, Required Minimum Distributions (RMDs), disability insurance, and even from gambling winnings.

Furthermore, there are state unemployment agencies that use taxable wage base to compute unemployment taxes.

Gross income is the starting number from which all tax liabilities are calculated and deductions can be made. Because eligible deductions can still be taken from gross income, there are instances when the taxable wage base does not equal to gross income. 

How is Taxable Wage Base connected to Social Security taxes? 

Taxable wage base and Social Security taxes are very much intertwined because the amount of Social Security tax owed by a person is based on their taxable wage base. 

Social Security tax is imposed by the federal government which funds the Social Security Program. The present Social Security tax rate is 12.4% which is divide into two contributions, one from the employee and the other from the employer at 6.2% each. 

Keep in mind that there is also a limit or maximum amount of income that a person must pay Social Security tax on called wage base. For 2021, the wage base is $142,800. This number is the threshold that can be taxed for Social Security. If an employee earns more than $142,800 per year, the employer should not withhold Social Security tax for income earned above $142,800.

If you know the taxable wage base of an employee, you can compute how much Social Security tax is withheld.

Let’s see some examples of how Social Security tax is calculated

• Ross is an employee who earns $80,000. How much Social Security tax is withheld from his paycheck? 

We know that the rate is 6.2%. Convert 6.2% to a decimal and multiply it to $80,000.

$80,000 × 0.062 = $4,960

$4,960 is the Social Security tax that will be withheld from Ross’ paycheck. 

• Grace is an employee who earns $160,000. How much Social Security tax is withheld from her paycheck? 

In this example, notice that Grace’s earnings are beyond the wage base limit of $142,800. In this case, Grace will only need to pay Social Security tax on $142,800. 

$142,800 × 0.062 = $8,853.60

Grace will pay $8,853.60. 

Do all taxes have a wage base? 

No, not all types of taxes have a wage base. The only taxes that have a wage based are Social Security tax, Federal Unemployment Tax Act (FUTA) tax, State Unemployment Tax Act (SUTA) tax, and other state-specific taxes. 

• Social Security tax – wage base is $142,800
• FUTA tax – wage base is $7,000
• SUTA and state-specific taxes – wage base may vary depending on the state

This means that federal, state, and local income taxes do not have a wage base. While Medicare does not have a wage base as well, there is an additional Medicare tax that taxpayers pay if they earn beyond a set amount.