What Is a Taxable Wage Base?

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DEFINITION

A taxable wage base generally refers to the maximum income amount on which certain taxes are based, particularly Social Security taxes or an employer’s share of taxes that go toward unemployment insurance.

Definition and Examples of Taxable Wage Bases

A taxable wage base generally is the highest income amount on which certain types of taxes are based on. That’s because unlike income taxes, for example, some types of taxes do not apply above certain thresholds.

  • Alternate names: contribution and benefit base, taxable maximum

For example, for 2022, the taxable wage base for Social Security (OASDI) is $147,000 for individuals. Any wages up to that amount would be taxed at 6.2% for employers, and 6.2% for employees (12.4% for self-employed individuals). The percentages are based on gross income for wage earners, rather than accounting for deductions; although if you’re self-employed, you pay based on your net earnings.

Yet any earnings above that taxable wage base would not incur additional OASDI taxes. Someone could earn $150,000 or $1 million in a given year, but they still would not pay any more for Social Security taxes than someone earning $147,000.

A taxable wage base can also apply to employers paying taxes for unemployment insurance. This amount can vary by state. For example, in 2022 in Washington, employers would pay taxes on employee earnings up to $62,500. So they would pay the same amount whether employees earn $62,501 or $625,000. In Georgia, however, this taxable wage base is only $9,500.

How a Taxable Wage Base Works

A taxable wage base works by identifying a dollar amount beyond which an individual can no longer be taxed for certain taxes, such as the OASDI tax. Other taxes, such as Medicare payroll taxes, are based on an uncapped percentage of income, so you’ll pay Medicare taxes no matter how much you earn.

Taxable wage base amounts can vary based on the type of tax and jurisdiction. For Social Security taxes, most years, as the cost of living goes up, the Social Security Administration provides an adjustment that slightly raises the maximum amount that these taxes are based on. For example, in 2021, the taxable maximum was $142,800, which then rose to $147,000 for 2022. The taxable wage base for OASDI taxes is $147,000, which means you and your employer pay taxes on the first $147,000 you make and none after that.

For unemployment insurance, the Federal Unemployment Tax Act (FUTA) has a taxable wage base of $7,000. Employers pay taxes on the first $7,000 in earnings per employee. States then can have varying levels in terms of what they set as the taxable wage base for unemployment insurance.

Some states keep the same base for several years, whereas others tend to make annual adjustments. In Washington, for example, the taxable wage base stems from annual average wage calculations. So, as the average salary increases, the taxable wage base does, too.

What a Taxable Wage Base Means for Individuals

Understanding what a taxable wage base is can help you have a better idea of your tax liabilities.

For example, if you’re self-employed and figuring out your estimated taxes, you would want to know if the taxable wage base affects how much you’ll pay in self-employment taxes. If you do very well and increase your earnings above $147,000 per year, you wouldn’t pay the OASDI portion of self-employment taxes above that amount.

As for the taxable wage base for unemployment insurance, even if you’re not an employer who pays that amount, it may be useful to know this information. Whatever your employer pays in taxes could potentially affect what they end up paying you in terms of your salary, so you might want to consider things like different tax rates in different states. That’s not to say that employers always effectively pass on the cost of taxes to employees, but it could be worth considering.

Key Takeaways

  • A taxable wage base is the maximum income amount that certain taxes are based on.
  • Taxable wage bases apply caps to Social Security taxes and the unemployment insurance taxes that employers pay, as opposed to taxes such as Medicare taxes that are uncapped.
  • Any earnings above a taxable wage base do not incur those taxes, such as how someone earning $1 million would still only pay Social Security taxes based on $147,000 in earnings for 2022.

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Article Sources

  1. Social Security Administration. “Contribution and Benefit Base.”

  2. Social Security Administration. “If You Are Self-Employed,” Page 1.

  3. Georgia Department of Labor. “Employers FAQs - Unemployment Insurance.”

  4. Washington State Employment Security Department. “Taxable Wage Base.”

  5. IRS. “Topic No. 759 Form 940–Employer's Annual Federal Unemployment (FUTA) Tax Return–Filing and Deposit Requirements.”