The taxable wage base is the maximum amount an employee earns in a calendar year on which the IRS imposes social security taxes. In simpler words, it’s the wage base an employee earns on which they must pay their social security taxes. It has three other names: taxable maximum, taxable threshold, and contribution and benefit base. However, you must not confuse it with taxable income.
While the employers will calculate the taxes and withhold the correct amount from an individual’s paycheck, the employees will still have to report their taxes on their tax returns each year. FUTA, SUTA, and certain state-specific taxes also depend on the taxable maximum.
Are Taxable Thresholds Any Different than Gross Pay?
Gross pay, also known as gross wages or gross income, is generally the same as the taxable thresholds of an employee. However, the amounts for these two may differ in some instances, as gross income is the income an employee makes before taxes.
For example, an employer uses the taxable threshold when reporting social security taxes. This wage base is reported on an employee’s Form W-2. On the contrary, all the deductions are made from gross wages. Besides, gross wages account for all sorts of income, including taxable and non-taxable pay.
Gross wages consist of the following things:
Earned interest on investments;
Vacation pay; and
How Can You Determine This Wage Base?
To determine the wage base that is taxable, you have to subtract all the non-taxable pay, deductions, and benefits that the employer provides. You’ll need to carry out the calculation in four steps.
Calculate the gross pay by adding all the incomes, such as wages, tips, bonuses, overtime, etc.
Subtract all the non-taxable pay from the gross pay, such as healthcare insurance, income from inheritance, etc.
Subtract all pre-tax deductions, such as medical and dental benefits and 401(k) retirement benefits, and mandatory deductions, such as FICA taxes and federal and state income taxes.
Add any fringe benefits the employer provides, such as company transportation, housing, and moving expenses.
The total that you get is the wage on which your social security taxes will be withheld.
How Does This Tax Base Apply to Various Taxes?
Withholding social security tax from the tax base is mandatory. Apart from that, the employer may withhold federal or state unemployment taxes if the state law mentions it. Other state-specific taxes may also be withheld.
According to the General Instructions for Form W-2, if an employer pays the social security taxes instead of deducting them from their wages, they must mention that the employees are subject to paying federal income tax. They are also subject to social security taxes, unemployment taxes, and Medicare taxes.
1. To Social Security Taxes
Both employers and employees have to pay social security taxes, until the employee earns more than the wage base, at a 6.2 percent rate from the employee’s wages. The maximum wage base is subject to changes annually. For 2023, it is $160,200.
This means that the maximum an employee should pay for social security in 2023 is:
As soon as an employee earns wages more than the threshold, the employer should stop paying for the employee’s taxes, that is, only if the employers have paid the taxes instead of deducting them from the paycheck.
2. To FUTA Taxes
Unlike social security taxes, the Federal Unemployment Tax Act (FUTA) taxes are only paid by the employer to fund dismissed employees during their unemployment period. FUTA taxes can be withheld from the wage base only if the state law instructs it.
FUTA taxes have a tax rate of 6 percent. The employer has to keep on calculating this rate until they reach the FUTA wage base limit, which is $7,000. However, if an employer files the taxes with Form 940 for SUTA taxes, they may receive a tax credit of up to 5.4 percent.
Following are the steps to calculate FUTA taxes:
Multiply the wage base of each employee by 6 percent, or 0.06.
The amount the employer finds must be withheld from the employee’s paycheck.
Repeat the former steps for each pay period until they reach the FUTA limit of $7,000, after which FUTA taxes are no longer withheld.
3. To SUTA Taxes
The State Unemployment Tax Act (SUTA) tax acts similarly to the FUTA tax, only that the state legislation governs it. Rules for the SUTA can vary across states. Therefore, employers must check with their state about calculating SUTA from their employees’ wage base.
Most states set a higher base for SUTA compared to the $7,000 FUTA tax base. Also, the SUTA tax is mostly employer-only pay. However, some states also demand it from the employees, which is why employers need to withhold taxes from the paychecks of their employees as well.
4. State-Specific Taxes
Based on which state or states a company is operating, the employers and employees also need to pay some state-specific taxes from the wage base of the employees. Employers should check with their state to see which taxes they’ll have to withhold or pay on behalf of their employees.
For example, laws in some states allow employers to pay medical assistance contributions to their employees. They may even withhold medical and healthcare taxes from their employees’ wage bases up to the required amount.