Taxable Wage Base
What Is the Taxable Wage Base?
The taxable wage base is the amount of an employee’s income from which the IRS calculates an individual’s tax liability for Social Security. In other words, the taxable wage base is the income an employee earns on which Social Security taxes must be paid.
An employer uses the taxable wage base to calculate the correct amount of Social Security taxes to withhold from a paycheck. It can also be used in other cases, such as to determine some state unemployment taxes, other state-specific taxes, or an employer’s federal unemployment tax withholdings.
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Are Taxable Wages the Same as Gross Income?
Generally speaking, an employee’s taxable wages are the same as an employee’s gross income (also called gross wage or gross pay) that is subject to taxation. However, there are some times when the taxable wage base is a different amount than the gross income. While the taxable wage base is the point from which Social Security taxes are calculated, the gross income is the point from which all deductions are made.
Gross income includes:
- Salary
- Tips
- Unearned income such as
- Dividends
- Interest earned on investments
- Royalties
- Gambling winnings
- Required Minimum Distributions (RMDs)
- Disability Insurance
How Are Taxable Wages Determined?
The taxable wage is determined by subtracting any non-taxable wages, deductions, and employer-provided benefits from the gross wage.
Here are the five steps in calculating taxable wages:
- Total all the wages, including salary, overtime, and tips. This becomes the gross wage.
- Subtract any non-taxable wages from the gross wage. This may include child support payments, most healthcare benefit premiums, etc.
- Subtract pre-tax deductions, such as retirement contributions and flexible spending accounts.
- Add any employer-provided fringe benefits like payments for moving expenses or use of a company car.
- The total is the amount of taxable wages, also called the taxable wage base.
For example:
($2,000 in wages + $400 in tips) - $500 in child support payments = $1,900 in taxable wages.
How Does the Taxable Wage Base Apply to Social Security Taxes?
The taxable wage base applies to Social Security taxes because the amount of Social Security taxes withheld from each paycheck is determined by the employee’s taxable wage base.
Once you know the taxable wage base (demonstrated above), calculate how much Social Security tax is withheld from an employee’s paycheck by multiplying the taxable wage base by the Social Security withholding rate of 0.062 (6.2% converted to a decimal). That’s the 2020 tax year rate so you may need to look up the current rate for your year.
For example:
$1,900 x 0.062 = $117.80 in Social Security taxes to be withheld.
How Does the Taxable Wage Base Apply to FUTA and Form 940?
The taxable wage base applies to FUTA (Federal Unemployment Tax Act) only when a state unemployment agency uses it to calculate the amount of unemployment taxes to be withheld from an employee’s paycheck. Note, not all state unemployment agencies use this method.
If your state doesn’t determine FUTA taxes by an employee’s taxable wage base (which is most states), the tax applies only to the first $7,000 an employee is paid during the year. This is called the FUTA wage base.
Follow these steps for calculating FUTA taxes:
- Convert the FUTA tax rate of 6% to a decimal (0.06). You may need to check that this rate is current.
- Multiply the employee’s current pay period’s wage base by the FUTA tax rate.
- The total is the amount of FUTA taxes to be withheld from an employee’s paycheck.
- Repeat each pay period until the FUTA wage base limit has been met ($7,000 usually).
For example:
$1,000 x 0.06 = $60 FUTA taxes to be withheld. Again, once an employee is paid (and pays FUTA taxes on) $7,000 in year-to-date wages, FUTA taxes are no longer withheld.
Employers must file Form 940 with the IRS to report their FUTA tax deposits.
What Taxes Have Wage Base Limits?
The taxes that have wage base limits are:
- Social Security = $137,700
- Federal Unemployment Tax Act (FUTA) = $7,000
- State Unemployment Tax Act (SUTA), also called State Unemployment Insurance (SUI) or Reemployment Tax = Varies by state
The above limits are for the year 2020, but are subject to change annually.
Wage base limits are the maximum amount of an employee’s wages that are subject to taxes per year. Once a yearly limit has been met for a specific tax, the employee doesn’t pay any more of that tax through the end of the year.