Table of Contents
- What Is the Taxable Wage Base?
- Key Takeaways
- Understanding the Taxable Wage Base
- Warning for Self-Employed
- Special Considerations
- Taxable Wage Base and Unemployment Tax
- Taxable Wage Base Exemptions
- Examples of Taxable Wage Base
- What Is the FICA Tax?
- How Is Social Security and Medicare Taxed for Self-Employed Individuals?
- Does Social Security Count As Income?
- At What Age Is Social Security No Longer Taxed?
- The Bottom Line
What Is the Taxable Wage Base?
Let me explain what the taxable wage base means—it's the maximum amount of your earned income that you have to pay Social Security taxes on. Your gross wages usually match this base, and your employer calculates it, withholding the right taxes from your paycheck. You still need to report it on your tax return each year. People also call it the Social Security wage base.
Key Takeaways
To sum it up quickly, the taxable wage base is that cap on earnings for Social Security taxes. It's the same as the Social Security wage base. For 2023, the max is $160,200, and it jumps to $168,600 in 2024. Your employer pays half the tax, you pay the other half. Some states use a similar base for unemployment taxes.
Understanding the Taxable Wage Base
The Social Security tax rate stands at 12.4%. Your employer covers 6.2%, and you handle the other 6.2% through deductions. But this tax only applies up to a certain earnings limit—anything over that, like extra wages or bonuses, isn't taxed for Social Security. This limit changes yearly based on the national average wage index.
In 2023, the cap is $160,200, and for 2024, it's $168,600. So, you won't pay Social Security taxes on income above these amounts. These taxes get deducted automatically with Medicare tax from your payroll. Remember, Medicare tax at 2.9% has no cap—it hits all your income.
You'll see your taxable wage base on your W-2 form in Box 3, which shows earnings subject to Social Security tax, and Box 4 shows what's withheld. Your employer sends this to you and the IRS every year.
Warning for Self-Employed
If you're self-employed, you cover both the employee and employer parts of Social Security and Medicare taxes yourself, paying directly to the IRS.
Special Considerations
These taxes fund Social Security benefits for millions each month, mainly retirement for those 65 and older. As of September 2023, 66.8 million people got benefits totaling $114.1 trillion. That includes 7.4 million disabled workers and 1.1 million dependents averaging $1,350 monthly, plus 5.8 million survivors getting $8.4 billion collectively.
Social Security and Medicare taxes together are FICA taxes, at 7.65% of your gross income, shown on your paystub and W-2.
Taxable Wage Base and Unemployment Tax
While we mostly talk about it for Social Security, the taxable wage base applies to other income-based taxes too. For instance, some states use it for unemployment taxes. In 2023, bases vary: Alaska at $47,100, California and Florida at $7,000, Kentucky at $11,100, Nevada at $40,100, New York at $12,300, Ohio at $9,000, Pennsylvania at $10,000, and Wyoming at $29,100. These adjust yearly or periodically by state.
Sometimes your wages include excess amounts over the base, which you can subtract from gross income, making your taxable base lower.
Taxable Wage Base Exemptions
Not all income counts toward the taxable wage base. Even if it's on your paycheck, some compensations are exempt fully or partially, such as payments to partners, disabled worker wages, workers' compensation, pay to minor family employees, life insurance, business travel expenses, dependent care or education assistance, retirement planning payments, payments to non-employees, and tips under $20 a month.
Note that the COVID-related Tax Relief Act of 2020 deferred employee Social Security tax withholding for Q4 2020 wages under $4,000 biweekly, payable from January to December 2021.
Examples of Taxable Wage Base
Let's look at examples using the 2024 base. If Rob earns $85,000 gross, with 6.2% withheld, the government collects $5,270 from him for Social Security.
For Sue earning $175,000, tax applies only up to $168,600, so she pays $10,453.20 as her share.
What Is the FICA Tax?
FICA tax, or Federal Insurance Contributions Act tax, is 7.65% on wages: 6.2% Social Security and 1.45% Medicare. You and your employer each pay half, deducted per paycheck.
How Is Social Security and Medicare Taxed for Self-Employed Individuals?
If you're self-employed, you pay the full 15.3% FICA on net business income after expenses. Rates match employees', but you deduct half on your tax return.
Does Social Security Count As Income?
Yes, Social Security benefits count as unearned income and may be taxed based on your total gross income. In 2023, up to 50% is taxable if you're single with $25,000+ or joint with $32,000+; up to 85% if single $34,000+ or joint $44,000+.
At What Age Is Social Security No Longer Taxed?
Benefits could be tax-free at full retirement age (66-67 depending on birth year) if they're your only income, but if gross income hits $25,000 single or $32,000 joint, they're taxed at your regular rate.
The Bottom Line
In essence, the taxable wage base sets the max annual income for payroll taxes like Social Security and Medicare. For 2024, it's $168,600, and it usually rises each year.
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