What Is the 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 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 that employees must pay Social Security taxes on.
- The taxable wage base is also known as the Social Security wage base.
- For 2021, the maximum amount of income that taxpayers must pay Social Security tax on is $142,800.
- When it comes to Social Security tax, half of the 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
As of 2021, 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. However, 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 taxable wage base for 2021—the maximum amount of income that is subject to Social Security taxes.
Consider an employee, Rob, who 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 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 $142,800, which is less than her gross income. Therefore, Sue will pay 6.2% x $142,800 = $8,853.60 as her contribution to the country’s Social Security account for retirees and the disabled.
Note that although Social Security tax is applied up to the taxable wage base, Medicare tax of 2.9% has no such limit; it is applied on 100% of income.
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 towards them appears as FICA taxes on their paystub and on their annual W-2 form.
A 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. These are the taxable wage bases to calculate state unemployment insurance in 2021 include:
- 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 has a list of the unemployment insurance taxable wage base for all states.
Like the taxable wage base for Social Security, the unemployment taxes basis increases every year—or every few years, in some cases.
Taxable Wage Base Exemptions
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 defers 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 applies to employees whose Social Security wages for a biweekly pay period were less than $4,000.
How Is the Taxable Wage Base Reported?
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 IRS and to the employee.
On the 2021 form, Box 3, entitled “Social security wages,” essentially gives your taxable wage base: It details how much of your earnings were subject to Social Security tax. Box 4 indicates the amount of Social Security tax that was withheld.
What Do Social Security Wages Fund?
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 are the retirement benefits paid to those 65-years-old and up. As of December 2020, there were 46 million of these retired workers and an additional three million dependents, receiving an average $1,544 monthly stipend.
Some 8.2 million disabled workers and their 1.5 million dependents also receive Social Security benefits—checks averaging $1,277 per month.
Finally, survivors of deceased retired or disabled workers are entitled to all or some benefits. There are six million Americans in this group, receiving a collective $7 billion.
Social Security Wage Base FAQs
What Is the FICA Tax?
Short for Federal Insurance Contributions Act taxes. the FICA tax is a duty imposed on wages and earnings. Constituting 15.3% of the employee’s gross pay, it actually consists of two separate taxes: Social Security (12.4%) and Medicare (2.9%). 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, liable for income taxes. More specifically, it counts as unearned income.
Whether you actually pay taxes on it, however, depends on your overall gross income. In 2021, 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.)
Given that the average Social Security monthly check is $1,544, if your Social Security benefits are your sole source of income, then they are usually not enough to be taxable. But if you are still working, or have income from other sources, it’s likely you’ll exceed the thresholds, incurring taxes on your benefits.
At What Age Is Social Security No Longer Taxed?
Theoretically, once you reach full retirement age (around 65-68, depending on your year of birth), your Social Security benefits could be tax-free. 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.
The bottom line is that Social Security benefits are taxable regardless of how old you are—age has little to do with it. Your total gross income is what counts.