Taxable Wage Base

The amount of an employee's income utilized by the IRS to determine how much Social Security tax is owed on that person is known as the taxable wage base. In other words, the taxable wage base is the amount of income earned by an employee on which Social Security taxes must be paid.

Employers use the taxable wage base to determine how much Social Security taxes should be deducted from employees' paychecks. It can also be used to calculate state unemployment taxes, other state-specific taxes, and an employer's federal unemployment tax withholdings.

Understanding Taxable Wage Base

The tax on Social Security is 12.4%. Employers are liable for paying half of the tax, or 6.2%, while employees are accountable for the other half through payroll deductions. The Social Security tax, however, is only applied to earnings up to a certain level. Over the specified maximum amount of earnings, wages, salaries, and bonuses are not taxed.Every year, the cap is changed to reflect shifts in the index of the average national wage.

The highest amount of income due to Social Security taxes in 2022 is $147,000, rising to $160,200 in 2023.This implies you don't have to pay Social Security taxes on any money above these limits. Individuals' Social Security and Medicare taxes are routinely withdrawn from their paychecks. Remember that, although the Social Security tax is imposed up to the taxable wage base, the 2.9% Medicare tax has no such limit. As a result, it is applied to the entire salary of an employee.

Each year, an employee's taxable wage base is disclosed on their W-2 form (the Wage and Tax Statement). Employers prepare W-2s once a year and send copies to both the IRS and the employee. Box 3 ("Social security wages") on the 2022 form essentially provides your taxable wage base, outlining how much of an individual's earnings are due to Social Security tax.The amount of Social Security tax withheld is displayed in Box 4.

How Does Taxable Wage Base Affect Social Security Taxes

The amount of Social Security taxes taken from each paycheck is based on the employee's taxable wage base, therefore the taxable wage base also applies to Social Security taxes.

The amount of Social Security tax deducted from an employee's paycheck is determined by multiplying the taxable wage base by the Social Security withholding rate of 0.062 (6.2% in decimal form), which can be found above. You might need to look up the current rate for your year since it is the rate for the 2020 tax year.

For instance:

$1,900 x 0.062 = $117.80 in Social Security taxes to be withheld.

Special Considerations

The monthly Social Security benefits that millions of people receive are paid for using taxes deducted from their earnings. Retirement benefits for people 65 and older are the most well-known of them. As of June 2022, the following is a summary of the number of people who receive each different Social Security benefit:

  1. An average of $1,669 per month was given to about 48 million of these retired workers and an additional 2.8 million dependents.
  2. Social Security compensation checks totaling $1,362 are distributed to up to 7.8 million disabled workers and their 1.3 million dependents each month.
  3. The right to receive all or a portion of benefits extends to the survivors of deceased retired or handicapped workers. In this category, which includes 5.9 million Americans, $7.8 billion is given out overall.

Key Takeaways

The highest amount of earned income that employees are required to pay Social Security taxes on is known as the taxable wage base. The taxable pay base is also known as the Social Security wage base.

In 2022 and 2023, the highest amount of income that taxpayers are required to pay Social Security tax on is $147,000 and $160,200, respectively.

Employers pay half of the Social Security levy, and employees pay the other half. Some state unemployment offices base their unemployment tax calculations on a taxable wage base.

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