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If you’re running payroll on your own like 40% of small business owners, it’s important to have a handle on wage bases. It can help you save time and avoid costly payroll mistakes that can lead to penalties.
Here’s a closer look into everything small business owners need to know about taxable wage bases.
What is a wage base?
Set by the IRS, a wage base is the maximum amount of an employee’s income that can be taxed in a given calendar tax year. Once the annual limit is reached, you’ll stop withholding taxes from their paychecks.
For 2023, the IRS has set the following wage bases:
- The Social Security wage base is $160,200, up from $147,000.
- The Federal Unemployment Tax wage base is $7000, unchanged from 2021.
- There is no wage base for Medicare taxes, but rates can vary with income — see the table below.
- Note also that additional wage bases may exist for state taxes.
That means the maximum contribution for Social Security in 2022 is $9114.00 ($147,000 x 6.2%). So once your employee has earned that much in taxable wages, you’ll no longer collect social security taxes from their paychecks or be required to contribute the employer portion. However, if an employee’s annual income is lower than the wage base in a given year, you will continue withholding and contributing accordingly throughout the whole year.
Keep in mind there are also wage bases for state-specific taxes. Depending on your business’s location, you may need to withhold or pay additional taxes.
Which taxes do wage bases apply to?
Wage bases apply to FICA (Federal Insurance Contributions Act), FUTA (Federal Unemployment Tax), and SUTA (State Unemployment Tax) taxes.
FICA is a payroll tax that both employees and employers are responsible for paying to the IRS. It covers Social Security program funding and the federal government’s Medicare trust fund. We cover the ins and outs of FICA taxes in another article.
- Social Security tax: In 2022, both you and your employees are responsible for paying 6.2% of their annual income up to the amount of $147,000. So, as we mentioned above, your maximum contribution for each employee is $9114.00 per year — and the same limit is set for your employee as well.
- Keep in mind the Social Security wage base limit tends to change from year to year. In 2020, it was $137,700. For 2021, it was $142,800. And in 2022 it was $147,000. You can see a chronological list here.
- Remember, once the new year rolls around, new taxes kick in. So, even if employees maxed out their contributions last year, they’ll have to start paying again come January 1.
- Medicare tax: You’re responsible for paying 1.45% of your employee’s taxable income up to $200,000 annually — as is your employee — towards Medicare taxes. Once they’ve made $200,000, your employee will be responsible for an additional 0.9% on top of the 1.45% they already owe. It simply means that wages above $200,000 are taxed at a higher rate of 2.35%. As the employer, you’re only responsible for matching the original 1.45% on any wages above $200,000.
This tax helps fund unemployment programs and is only paid by the employer. You’re responsible for paying 6% of the first $7,000 of your employee’s taxable income for a maximum contribution of $420 per employee.
But there’s a caveat. If you pay your SUTA taxes in full and on time, you can qualify for a tax credit of up to 5.4%, significantly reducing your responsibility. Check out this video from the IRS which goes into more detail about how you can qualify.
While the federal unemployment wage base is $7,000 per employee, states set their unemployment wage base themselves. Most opt for a higher threshold than the federal one, and tax rates will vary from state to state, so it’s important to check out your state’s unemployment wage base for 2022.
What are the wage bases for 2023?
The table below breaks out wage bases for 2023. Also, you can learn more about what FUTA tax is and paying it to the IRS. Or, if letting go of an employee, our unemployment insurance by state directory includes links with steps to take and how workers file claims.
|Tax Type||Employer rate||Employee rate||Wage base limit|
How are taxable wages reported?
Employers are responsible for keeping track of employees’ income and making tax payments throughout the year. For more detail, here’s our complete guide to calculating payroll taxes. In addition to quarterly reports, employers are responsible for sending employees and the IRS copies of their W-2 forms (which are also known as the Wage and Tax Statement). We also have a whole set of instructions on how to complete a W-2 form.
If you need help making sure you’re calculating all of your taxes correctly, use this free payroll tax calculator to calculate payroll tax rates in all 50 states or consider full-service payroll software that automates all the payroll taxes and filings for you.