The Beginner's Introduction to Taxable Wage Bases

The Social Security Administration announced in October 2018 that the taxable wage base for old age, survivors, and disability insurance would be increasing from $128,400 to $132,900 for the 2019 tax year. For employers and their payroll departments, this means a change in withholding. However, that's not all. A few other changes will affect withholding in 2019 as well.

We thought it might be a good idea to go over wage bases in light of the coming changes. This post is intended for beginners. It is for new business owners who do not quite yet have a handle on everything related to payroll. To that end, we would be happy to assist you if you are one of those business owners.

 

The Wage Base Defined

A wage base is a certain amount of money used as a baseline for taxation. We like Investopedia's definition of the 'taxable wage base' for the purposes of this discussion. Here's what they say about it:

"The taxable wage base is the maximum amount of earned income that employees must pay Social Security taxes on. Generally, the employee's gross wages will be equal to the taxable wage base."

This definition specifically relates to Social Security taxes. However, it can be applied more broadly as well. It just depends on an employer's tax jurisdiction and the federal and state laws the govern it. In the simplest possible terms, a wage base is the maximum amount of income that can be taxed.

 

2 Kinds of Taxable Wage Bases

As an employer, there are two kinds of wage bases you have to be concerned with. First are the three bases used to determine how much tax you withhold from employee paychecks. There are three in particular:

  • Social Security tax
  • SUTA (state unemployment insurance contributions)
  • Additional taxes assessed by state and local taxing authorities.

The other kind of wage bases are those for which you, as the employer, are responsible for contributing to. They include the three bases listed above as well as one more: FUTA. This fourth wage base relates to federal unemployment insurance.

As previously mentioned, the 2019 wage base for Social Security tax is $132,900. That means taxes are paid only on that amount of earned income. If an employee earns in excess of that amount, the extra amount is not subject to Social Security withholding. As an employer, you are not required to contribute additional taxes on that excess income either.

The FUTA wage base for 2019 is $7,000. As for SUFTA and any additional taxes assessed by states and local jurisdictions, their wage bases vary. There is no practical way for us to address the rates in all 50 states, so check with your state taxing authorities for more information.

 

More about Social Security Tax 

In closing out this post, we want to speak a little bit more about Social Security tax. This is a two-pronged tax that is paid jointly by employer and employee. The total amount is 12.4% of an employee's taxable wages. However, employer and employee both pay half, which works out to 6.2%.

Let's say you have an employee who earns $50,000 during the 2019 tax year. By the time the year has ended, both you and that worker will have paid 6.2% of $50,000, or $3,100. Your company will have paid its share directly by making Social Security tax deposits. The employee will have paid through the company, by way of withholding.

You should now understand the basics of taxable wage bases. They are the starting point for withholding and making the required tax payments.

 

Sources:

Investopedia – https://www.investopedia.com/terms/t/taxable-wage-base.asp