What is the taxable wage base?

The taxable wage base is the amount of an employee's income from which the IRS calculates a person's tax liability for Social Security. In other words, the taxable wage base is the amount of income the employee earns on which  Social Security tax  must be paid.

The employer uses the taxable wage base to calculate the correct amount of Social Security taxes to deduct from wages. It can also be used in other cases, such as to   determine certain state unemployment taxes  , other state-specific taxes, or the employer's federal unemployment tax  deduction .

Are taxable wages the same as gross income?

Generally, an employee's taxable pay is the same as the employee's  gross income  (also called gross wages or gross salary), which is subject to taxation. However, there are times when the taxable wage base is a different amount than gross income. While the taxable wage base is the point from which Social Security taxes are calculated, gross income is the point from which all deductions are made.

Gross income includes:

• Salary
• Tips
• unearned income such as
• dividends
• Interest earned on investments
• royalty
• winning in gambling
• Required Minimum Distributions (RMDs)
• disability insurance

How are taxable wages determined?

Taxable pay is determined by subtracting any non-taxable wages,  deductions  , and employer-provided benefits from gross pay.

The five steps in calculating taxable wages are as follows:

1.  Add up all wages, including  salary, overtime and tips . This becomes the gross pay.
2. Subtract any non-taxable wages from gross pay. This can include child support payments, most healthcare benefit premiums, etc.
3. Subtract pre-tax deductions, such as retirement contributions and  flexible spending accounts  .
4. Include any additional benefits provided by the employer, such as relocation expenses or payment for the use of a company car.
5. The total amount is the amount of taxable wages, also called the taxable wage base.

For example:

($2,000 salary + $400 tips) – $500 child support payment = $1,900 taxable wages.

The taxable wage base applies to Social Security taxes, because the amount of Social Security taxes deducted from each paycheck is determined by the employee's taxable wage base.

Once you know the taxable wage base (shown above), calculate how much Social Security tax is withheld from an employee's wages by multiplying the taxable wage base by the Social Security withholding rate of 0.062 (6.2% converted to a decimal). This is the rate for the 2020 tax year, so you may need to look up the current rate for your year.

For example:

$1,900 x 0.062 = $117.80 in Social Security taxes to be withheld.

How does the taxable wage basis apply to FUTA and Form 940?

The taxable wage base  applies to FUTA  (Federal Unemployment Tax Act) only when a state unemployment agency uses it to calculate the amount of unemployment taxes to be deducted from an employee's pay. Note, not all state unemployment agencies use this method.

If your state doesn't determine FUTA tax based on an employee's taxable wage base (which most states do), the tax only applies to the first $7,000 paid to the employee during the year. This is called the FUTA wage base.

Follow these steps to calculate FUTA taxes:

1. Convert the FUTA tax rate 6% to a decimal (0.06). You may need to check if this rate is current.
2. Multiply the employee's current pay period's wage base by the FUTA tax rate.
3. This total amount is the amount of FUTA taxes to be deducted from an employee's salary.
4. Repeat each  pay period  until the FUTA wage base limit (usually $7,000) is met.

For example:

$1,000 x 0.06 = $60 in FUTA taxes to be withheld. Again, when an employee is paid $7,000 in salary year-to-year (and pays FUTA taxes on it), no FUTA taxes are withheld.

 Employers must file Form 940 with the IRS to report their FUTA tax deposits  .

Which taxes have a wage base limit?

Taxes that have wage base limits:

• Social Security = $137,700
• Federal Unemployment Tax Act (FUTA) = $7,000
• State Unemployment Tax Act (SUTA),   also called  State Unemployment Insurance (SUI) or reemployment tax = varies by state

The above limits are for the year 2020 but are subject to change annually.

The wage base limit is the maximum amount of an employee's wage that is taxed each year. Once the annual limit for a specific tax is reached, the employee does not have to pay any more of that tax until the end of the year.