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. In 2022, the taxable maximum was $147,000. It rose to $160,200 for 2023. The taxable wage base for OASDI taxes means you and your employer pay taxes on money up to that threshold 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. 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. In Georgia, however, this taxable wage base is only $9,500.
Example of a Taxable Wage Base
For tax year 2022, the taxable wage base for Social Security (OASDI) is $147,000 for individuals. It’s $160,200 for tax year 2023. Any wages up to that amount would be taxed at 6.2% for employers, and 6.2% for employees (12.4% total, and for self-employed individuals who pay both parts). 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 $1 million in 2023, but they still pay the same amount of Social Security taxes as someone earning $160,201.
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 the annual threshold for the 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.
