Taxable Wage Base
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 equivalent to the taxable wage base. Normally, an employer will handle this calculation and withhold the right amount of taxes from every one of the employee's paychecks; however, the employee is as yet responsible for reporting the tax on their tax return every year. The taxable wage base is otherwise called the Social Security wage base.
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. However, Social Security tax is applied to earnings up to a certain limit. Wages, salaries, and bonuses in excess of the stipulated maximum amount of earnings are not taxable. The limit changes annually, pegged to changes in the public average wage index.
$147,000
The taxable wage base for 2022 — the maximum amount of income that is subject to Social Security taxes.
Think about 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 retired folks. In certain occurrences, an employee will earn wages that can be classified as excess wage. The excess wage can be subtracted from gross income with the goal that the taxable wage base is lower than gross income.
For instance, assume another employee, Sue, earns $175,000 gross income. The Social Security tax rate will simply be applied up to the taxable wage base of $147,000, which is not as much as her gross income. Hence, Sue will pay 6.2% x $147,000 = $9,114 as her contribution to the country's Social Security account for retired folks and the disabled.
Note that albeit 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 shows up as FICA taxes on their paystub and on their annual W-2 form.
Unemployment Tax
A taxable wage base is most frequently utilized in reference to Social Security taxes, however it can apply to any income-based tax. For instance, some state unemployment agencies utilize a taxable wage base to work out unemployment taxes. These are the taxable wage bases to compute state unemployment insurance in 2021:
- 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 rundown of the unemployment insurance taxable wage base for all states.
Like the taxable wage base for Social Security, the unemployment taxes basis builds consistently — or like clockwork, at times.
Taxable Wage Base Exemptions
Regardless of whether they are remembered for a paycheck, a few common types of compensation are exempt from the taxable wage base, either totally 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 administrations
- Payments to certain non-employees
- Tips under $20 per month
The COVID-related Tax Relief Act of 2020 concedes 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 under $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) every year. Employers prepare the W-2s annually, sending duplicates to both the IRS and to the employee.
On the 2021 form, Box 3, named "Social security wages," basically gives your taxable wage base: It subtleties how quite a bit of your earnings were subject to Social Security tax. Box 4 shows the amount of Social Security tax that was withheld.
What Do Social Security Wages Fund?
The taxes that are removed from Social Security wages go to fund the Social Security payments that millions receive every month. The most popular of these are the retirement benefits paid to those 65-years of age and up. As of June 2021, there were 46.7 million of these retired workers and an extra 2.9 million dependents, getting an average $1,555 month to month stipend.
A few 8.1 million disabled workers and their 1.4 million dependents likewise receive Social Security benefits — checks averaging $1,280 each month.
At long last, survivors of deceased retired or disabled workers are qualified for all or a few benefits. There are 5.9 million Americans in this group, getting a collective $7.3 billion.
Features
- When it comes to Social Security tax, half of the tax is paid by the employer, while half is paid by the employee.
- The taxable wage base is otherwise called the Social Security wage base.
- The taxable wage base is the maximum amount of earned income that employees must pay Social Security taxes on.
- For 2022, the maximum amount of income that taxpayers must pay Social Security tax on is $147,000.
- Some state unemployment agencies utilize a taxable wage base to work out unemployment taxes.
FAQ
What Is the FICA Tax?
Short for Federal Insurance Contributions Act taxes, the FICA tax is a duty forced on wages and earnings. Comprising 7.65% of the employee's gross pay, it actually comprises 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 removed from each paycheck.
At What Age Is Social Security No Longer Taxed?
Hypothetically, when you arrive at full retirement age (around 66-67, depending on your time of birth), your Social Security benefits could be tax-free. In any case, that is provided that they're your sole source of income. All the more specifically, on the off chance that your overall gross income is $25,000 or above ($32,000 whenever married filing jointly), they are taxable, at your ordinary income tax rate.
How Is Social Security and Medicare Taxed for Self-Employed Individuals?
Self-employed individuals (independent contractors, sole owners, and so forth) must pay the two parts of Social Security and Medicare taxes — the whole 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 equivalent to for employees, the self-employed can take a deduction for half the amount on their tax returns.
Does Social Security Count as Income?
Indeed, for a great many people, Social Security considers income, and is, hence, obligated for income taxes. All the more specifically, it counts as unearned income. Whether you actually pay taxes on it, however, relies upon your overall gross income. In 2021, up to half of Social Security income is taxable for individuals with a total gross income of something like $25,000, or couples filing jointly with a combined gross income of no less than $32,000. Up to 85% of Social Security benefits are taxable for an individual with a combined gross income of something like $34,000, or a couple filing jointly with a combined gross income of no less than $44,000. (These sums incorporate your benefit payments.)
