One of the many taxes that employers must pay is the Social Security tax. Employers and employees both contribute, but it is a little different than other taxes. That’s because there is a limit to the amount that needs to be contributed annually. Commonly known as the wage base, this limit is updated each year and represents the maximum amount of earnings that are considered to be taxable. This means that once the base is reached, employers are no longer required to withhold Medicare tax from their employees’ hard-earned wages. Additionally, the employer is no longer required to contribute additional taxes.
Though Social Security was adopted over 70 years ago, not all employers are familiar with how the wage base works or what the taxes are used for. So, in this guide, we’ll define what the wage base is, what employers should know about Social Security tax, and explain how the calculations work.
Understanding what the Social Security wage base is
In the simplest terms, the Social Security wage base refers to the maximum amount of earnings that are subject to Social Security taxes. The base is set by the Social Security Administration annually, and is based on current inflation rates. What are these taxes used for? They fund various Social Security programs that include benefits for retired workers and their dependents, worker disability, and survivors benefits.
Once the established Social Security wage base is met, you can stop withholding and paying Social Security tax. But if the wage base is not reached during the year, you must continue to withhold 6.2% of your employee’s wages and pay your portion of the tax, which is an additional 6.2%, until the wage base is reached.
Now that we’ve covered what the wage base is, let’s look at the key elements that employers should be aware of.
What should employers know about Social Security tax?
The Social Security wage base will rise in 2025 to $176,100, a 4.44% increase from 2024 (which was $168,600). The wage base changes each year, with an adjustment based on the national average wage index, with wage increases outpacing previous years in large part due to high inflation rates. Both employers and employees pay Social Security tax, until the wage base is reached.
A total of 12.4% of an employee’s wages are paid into Social Security, with the tax split between employers and employees, with each responsible for half, which comes out to 6.2%.
- With the $168,600 wage cap in place for 2024, the maximum that each party would be responsible for is $10,453.20, adding up to a total contribution of $20,906.40 in 2024.
- The numbers will change in 2025 as the wage cap goes up. The maximum that each party will be responsible for is $10,918.20, totaling up to $21,836.40 in 2025.
- Self-employed individuals are on the hook for the entire 12.4% Social Security tax contribution because they do not have an employer that is able to contribute half of the tax.
Next, let’s find out if the wage base is fixed or if there are times when it can change.
Does the Social Security wage base change?
Social Security tax is part of the Old-Age, Survivors, and Disability Insurance (OASDI), which is financed through both employer and employee contributions. The Social Security Administration limits the amount of employee earnings that are subjected to Social Security tax each year. The annual limit — called the contribution and benefit base — does change annually with the updates based on the national average wage index.
A somewhat complex formula is used to determine the Social Security wage base for the upcoming year. That said, it is only put to use when a cost of living increase has gone into effect during December of the year in which a wage base needs to be determined. Because there was a cost of living increase in December 2023, this formula was used to determine the contribution and benefit base for 2024.
OASDI uses the following numbers to calculate the 2024 Social Security Wage Base:
- 1994 Wage Base (used for any year after 1994) – $60,600.00
- 1992 Average Wage Index – $22,935.42
- 2023 Average Wage Index – $66,621.80
Using the numbers above, the 2025 wage base was calculated as follows:
$60,600 x $66,621.80 / $22,935.42 = $176,028.22
The result needs to be a multiple of 300, so $176,028.22 is rounded up to $176,100.00 which became the wage base for 2025. Since $176,100.00 is higher than last year’s wage base of $168,600.00, the increase goes into effect in January 2025. If the result had been lower than the previous year, there would have been no increase in the wage base for 2025, nor would the wage base have been lowered.
Are FICA and Social Security contributions the same thing?
The Federal Insurance Contributions Act or FICA was enacted in 1935 as a tax on employee paychecks, with employers required to match employee contributions. Social Security tax is part of FICA, with the tax collected used to fund numerous Social Security programs.
FICA requires that 7.65% of an employee’s gross wages get deducted for payment to the federal government, with employers required to match the withholding. 6.2% of the 7.65% total is Social Security tax, which funds social programs, while 1.45% of the contribution is directed towards Medicare tax, which funds hospital insurance for retired and disabled workers.
To help illustrate this, the table breaks down how
|
Social Security % |
Medicare % |
Total % |
| Employer |
6.2% |
1.45% |
7.65% |
| Employee |
6.2% |
1.45% |
7.65% |
| Self-Employed |
12.4% |
2.9% |
15.3% |
However, only Social Security tax uses a wage base for contributions. Medicare tax does not use a wage base limit, so you’ll have to continue to withhold and contribute 1.45% of your employee’s wages annually.
Now that we better understand how Social Security and FICA fit together, let’s see how calculating Social Security tax works in practice.
Calculating Social Security tax
Calculating Social Security tax is straightforward, but let’s take a look at a specific example to see how simple it can be.
Social Security scenario
Jane earns gross wages of $2,000 on every paycheck. As her employer, it is your responsibility to withhold 6.2% of Jane’s gross wages for every paycheck during the entire year, or until she reaches the $168,600 wage base.
Now that we have the numbers we need to work with, let’s calculate the amount of Social Security tax you would have to pay on Jane’s behalf.
$2,000 x 6.2% = $124
The total of $124 is the amount that you would have to withhold from Jane’s paycheck. As her employer, you are also responsible for matching the $124, paying a total of 12.4% or $248 on Jane’s behalf. In addition, you’re also responsible for Medicare tax withholding of 1.45% for each employee.
On the flip side, if Jane were self-employed, she would be required to contribute the entire $248 for Social Security tax along with Medicare taxes herself.
Understanding the Social Security Wage base is worthwhile
Being an employer comes with many responsibilities, and withholding the appropriate amount of taxes — including Social Security tax — is one of those to-dos that comes with the territory. Because the wage base changes annually, communicating those changes to your employees in a timely fashion can prevent confusion (and keep your team up to date).
Good luck as you continue to grow your business and keep tabs on all the different taxes employers are responsible for.
Please note all material in this article is for educational purposes only and does not constitute tax or legal advice. You should always contact a qualified tax, legal or financial professional, in your area for comprehensive tax or legal advice.
