Understanding the Taxable Wage Base: Essential Guide for 2023 and Beyond

The term taxable wage base refers to the maximum amount of earned income on which employees must pay Social Security taxes. Typically, an employer handles this calculation and ensures the correct amount of taxes is withheld from each paycheck. Meanwhile, employees must report this tax on their annual tax returns. The taxable wage base is also known as the Social Security wage base.

Key Takeaways

The taxable wage base is the ceiling amount of earned income subjected to Social Security taxes.
It’s also known as the Social Security wage base.
For 2023, the maximum income on which Social Security tax is paid is $160,200, and it rises to $168,600 in 2024.
Half of the Social Security tax is borne by the employer and the other half by the employee.
Some state unemployment agencies also use a taxable wage base for calculating unemployment taxes.

What Is the Taxable Wage Base?

The Social Security tax rate stands at 12.4%, with 6.2% paid by the employer and 6.2% via employee payroll deductions. However, Social Security tax applies only up to a specified earnings limit. Earnings exceeding this threshold are not taxable.

For 2023, this limit is $160,200, growing to $168,600 in 2024. Amounts above these thresholds are not subject to Social Security taxes, though the Medicare tax applies to 100% of income without any limits.

Reporting and Payroll Deductions

An employee’s taxable wage base is reported on their W-2 form (Wage and Tax Statement). Employers prepare annual W-2s, sending copies to both the IRS and the employee. Box 3 on the form details the amount of an employee’s earnings subject to Social Security tax, while Box 4 states the Social Security tax withheld. Self-employed individuals need to pay both the employee and employer portions of both Social Security and Medicare taxes directly to the IRS.

Special Considerations

Taxes taken from Social Security wages fund various benefits, like retirement payouts for individuals aged 65+. A total of 66.8 million beneficiaries received Social Security benefits in September 2023, comprising:

7.4 million disabled workers and their 1.1 million dependents, with checks averaging $1,350 per month.
5.8 million survivors of deceased retired or disabled workers, receiving $8.4 billion collectively.

FICA taxes represent both Social Security and Medicare taxes, accounting for 7.65% of gross income, deducted as FICA taxes on paystubs and annual W-2 forms.

Taxable Wage Base and Unemployment Tax

The concept of the taxable wage base extends beyond Social Security to include state unemployment taxes, for example:

Alaska: $47,100
California: $7,000
Florida: $7,000
Kentucky: $11,100
Nevada: $40,100
New York: $12,300
Ohio: $9,000
Pennsylvania: $10,000
Wyoming: $29,100

Some earnings classified as excess wages can lower the taxable wage base when subtracted from gross income.

Taxable Wage Base Exemptions

Certain types of compensation, even if included in a paycheck, are either partially or fully exempt from the taxable wage base, such as:

Payments to partners of a partnership
Disabled worker wages
Workers’ compensation benefits
Compensation to minor family employees
Life insurance coverages
Business travel expenses
Dependent care, education, retirement planning assistance
Payments to certain non-employees
Tips under $20 a month

The COVID-related Tax Relief Act of 2020 deferred the employee share of Social Security tax on Q4 wages till the beginning of January 2021 through December 2021 for employees with biweekly pay wages less than $4,000.

Examples of Taxable Wage Base

Two detailed examples highlight the workings of the taxable wage base:

Rob earns $85,000 in gross income. With a 6.2% Social Security tax, he pays $5,270 (6.2% x $85,000) in Social Security tax.

Suppose Sue earns $175,000 gross income. With a taxable wage base of $168,600, she will pay $10,453.20 (6.2% x $168,600) as Social Security tax.

What Is the FICA Tax?

FICA taxes are divided into Social Security (6.2%) and Medicare (1.45%) tax, totaling a 7.65% employee deduction and an equal employer contribution. Self-employed individuals pay the full 15.3% but can deduct half from their taxable income.

Yes, Social Security is often considered unearned income, subject to income taxes. However, its taxation depends on overall gross income. In 2023, 50% of Social Security income is taxable for incomes $25,000+ for individuals, and 85% for incomes $34,000+.

Only if Social Security benefits are your sole income and your overall gross income is less than $25,000 ($32,000 if joint filing) at retirement age 66-67, it’s not taxed.

The Bottom Line

The taxable wage base determines the limit of earned income subject to payroll taxes like Social Security and Medicare. As of 2024, the limit is set at $168,600 and often increases annually.

Related Terms: Earned Income, Gross Income, FICA, Medicare, Unemployment Tax, Self-employment tax.

References

Internal Revenue Service. “Understanding Employment Taxes”.
Social Security Administration. “Fact Sheet: 2024 Social Security Changes,” Page 1.
Social Security Administration. “How Is Social Security Financed?”
U.S. Department of Labor. “Unemployment Insurance Tax Topic”.
Internal Revenue Service. “Topic No. 751, Social Security and Medicare Withholding Rates”.
Social Security Administration. “Understanding the Benefits”, Page 3.
Internal Revenue Service. “2023 General Instructions for Forms W-2 and W-3”, Page 17.
Social Security Administration. “Fact Sheet,” Page 1.
Official Alaska State Website. “Employment Security Tax FAQ”.
Employment Development Department. “2023 California Employer’s Guide”, Page 9.
Florida Department of Revenue. “Reemployment Tax Rate Information”.
Kentucky Career Center. “Kentucky’s Unemployment Insurance Self-Service Web”.
Nevada Department of Employment, Training and Rehabilitation. “What’s New in UI Tax”.
New York State Department of Labor. “NYS-45 Quarterly Reporting”.
Ohio Department of Job & Family Services. “Taxable Wage Base”.
Office of Unemployment Compensation. “Yearly Tax Highlights”.
Wyoming Workforce Services. “Unemployment Taxable Wage Base”.
Internal Revenue Service. “Publication 15 (2023), (Circular E), Employer’s Tax Guide”.
Internal Revenue Service. “Deferral of Employment Tax Deposits and Payments Through December 31, 2020”,
Internal Revenue Service. “Topic No. 756 Employment Taxes for Household Employees”.
Internal Revenue Service. “Self-Employment Tax (Social Security and Medicare Taxes)”.
Social Security Administration. “Understanding Supplemental Security Income SSI Income – 2022 Edition”.
Social Security Administration. “Retirement Benefits”, Pages 11-12.
Social Security Administration. “Starting Your Retirement Benefits Early”.
Social Security Administration. “Income Taxes And Your Social Security Benefit”.

Get ready to put your knowledge to the test with this intriguing quiz!

--- primaryColor: 'rgb(121, 82, 179)' secondaryColor: '#DDDDDD' textColor: black shuffle_questions: true --- ## What is the Taxable Wage Base? - [x] The maximum amount of earnings on which an employee is required to pay taxes - [ ] The minimum salary threshold for tax liability - [ ] The average wage of an employee in a given sector - [ ] The base salary that is exempt from taxation ## Which tax is commonly associated with the Taxable Wage Base? - [ ] Income tax - [x] Social Security tax - [ ] Sales tax - [ ] Property tax ## What happens to earnings above the Taxable Wage Base? - [ ] They are taxed at a lower rate - [ ] They are fully exempt from any tax - [x] They are not subject to Social Security tax but may be subject to other taxes - [ ] They are classified as non-taxable income ## Which statement best describes how the Taxable Wage Base affects employees? - [ ] Employees earn more take-home pay once their earnings exceed the Taxable Wage Base - [ ] Employees’ tax rates increase significantly once they hit the Taxable Wage Base - [x] Employees no longer pay Social Security tax on earnings above the Taxable Wage Base - [ ] Employees receive tax credits once they exceed the Taxable Wage Base ## How often is the Taxable Wage Base for Social Security typically adjusted? - [ ] Monthly - [ ] Quarterly - [ ] Annually - [x] Periodically and can change once per year ## Who typically sets the Taxable Wage Base? - [x] The federal government - [ ] State governments - [ ] Individual employers - [ ] The industry regulatory bodies ## What is one purpose of setting a Taxable Wage Base? - [ ] To limit the income tax liabilities of all wage earners - [x] To cap Social Security tax collection at a certain earnings level - [ ] To ensure uniform tax rates across all income levels - [ ] To provide equal tax advantages to all income groups ## If an employee's total earnings are $150,000 in a year and the Taxable Wage Base is $142,800, on what amount will the Social Security tax be applied? - [ ] $150,000 - [x] $142,800 - [ ] The amount varies state by state - [ ] $7,200 ## Why might the Taxable Wage Base be adjusted upward over time? - [ ] To reduce Social Security benefits - [ ] To increase government revenue - [x] To reflect inflation and wage growth - [ ] To implement new tax legislation ## Can the Taxable Wage Base impact an employer's overall tax liabilities? - [ ] No, it only applies to employee wages - [ ] Yes, by increasing corporate tax rates - [x] Yes, employers pay Social Security taxes up to the Taxable Wage Base too - [ ] Only in sectors regulated by state governments