Understanding the Social Security wage base: Key facts every employer should know in 2023

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 for 2023 rose to $160,200, a nearly nine percent increase from its 2022 wage base of $147,000. 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 $160,200 wage cap in place for 2023, the maximum that each party would be responsible for is $9,932.40, adding up to a total contribution of $19,864.80 in 2023.

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 2022, this formula was used to determine the contribution and benefit base for 2023.

OASDI uses the following numbers to calculate the 2023 Social Security Wage Base:

• 1994 Wage Base (used for any year after 1994) – $60,600
• 1992 Average Wage Index – $22,935.42
• 2021 Average Wage Index – $60,575.07

Using the numbers above, the 2023 wage base was calculated as follows:

$60,600 x $60,575.07 / $22,935.42 = $160,051.54

The result needs to be a multiple of 300, so $160,051.54 is rounded up to $160,200, which becomes the wage base for 2023. Since $160,200 is higher than last year’s wage base of $147,000, the increase went into effect in January 2023. If the result had been lower than the previous year, there would have been no increase in the wage base for 2023, 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

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 $160,200 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.