What is the taxable wage base?
Taxable wage base is a US-specific tax term, and represents the maximum amount of earned income on which an employee must pay social security taxes.
How to calculate taxable wage base
To calculate the taxable wage base, you first need to calculate the total gross wage. This is your employee’s pay, as well as any overtime and additional earned income (such as tips).
Next, subtract any non-taxable wages (such as insurance premiums and child support payments), as well as any pre-tax deductions (such as retirement contributions).
Finally, add any employer-provided fringe benefits.
The remaining amount is the taxable wage base, from which you must withhold their social security taxes.
Example:
In April, your employee earns a base pay of $2,000, plus overtime of $400. As a result, their gross wage for the month is $2,400.
The employee makes insurance and retirement contributions of $400 for the month, and receives an employer benefit of $100 for use of a company car.
Therefore, the taxable wage base would be:
$2,400 - $400 + $100 = $2,100
Using the 2023 IRS withholding rate of 6.2%, you would need to withhold social security taxes of $130.20 .
Note that, for social security and unemployment taxes, there is a maximum taxable limit. This means that, if your employee’s wages exceed a certain amount, they don’t need to pay any more tax on the additional amount. These limits are reviewed annually.
Key considerations
- There's a yearly maximum limit for social security and unemployment taxes. Once employees reach that limit, no more tax is deducted on higher earnings.
- This term only applies in the US. Similar concepts exist elsewhere with different names and thresholds.