Taxable Wage Base

The taxable wage base is the maximum amount of earned income that employees must pay Social Security taxes on. Generally, the employee's gross wages will be equal to the taxable wage base. Typically, an employer will handle this calculation and withhold the correct amount of taxes from each of the employee's paychecks; however, the employee is still responsible for reporting the tax.

The taxable wage base is also known as the Social Security wage base.

Social Security tax is not applied on wages, salaries, and bonuses in excess of the stipulated maximum amount of wages that is subject to Social Security taxes. As of 2018, the Social Security tax rate is 12.4%. Half of the tax is paid by the employer, and the employee is responsible for paying the other half, that is 6.2%. The maximum amount of income that taxpayers must pay Social Security tax on is $128,400. In other words, the taxable wage base is $128,400.

Consider an employee, Rob, who earns $85,000 in gross income for the tax year 2018 and has a 6.2% Social Security tax withheld from his pay. The federal government, in effect, will collect 6.2% x $85,000 = $5,270 from Rob to help fund retirement and disability benefits for retirees. In some instances, an employee will earn wages that can be classified as excess wage. The excess wage can be subtracted from gross income so that the taxable wage base is lower than gross income. For example, assume another employee, Sue, earns $175,000 gross income. The Social Security tax rate will only be applied up to the taxable wage base of $128,400, which is less than her gross income. Therefore, Sue will pay 6.2% x $128,400 = $7,960.80 as her contribution to the country’s Social Security account for retirees and the disabled.

Taxable wage base is most often used in reference to Social Security taxes, though it can apply to any income-based tax. For example, some state unemployment agencies use a taxable wage base to calculate unemployment taxes. In California, the taxable wage base (as of 2018) is $7,000, Ohio - $9,500, Pennsylvania - $10,000, New York - $11,100, Connecticut - $15,000, Oklahoma - $17,600, Wyoming - $24,700, Nevada - $30,500, Hawaii - $45,900, etc. Refer to the American Payroll Association website for the unemployment insurance taxable wage base for all states.

The taxable wage base for Social Security and Unemployment taxes increases every year or every few years. Note that although Social Security tax is applied up to the taxable wage base, Medicare tax is applied on 100% of income.