What is a Taxable Wage Base?
How Does a Taxable Wage Base Work?
For example, let's assume that John earns $150,000 a year as CFO of Company XYZ. The United States government has set the taxable wage base for Social Security taxes at $110,000 this year, meaning that John will only pay Social Security taxes on the first $110,000 of his income.
Let's say that John's take-home pay is $8,000 each paycheck. Once he has earned $110,000 for the year his employer will stop withholding Social Security taxes. After John's taxable wage base is hit, his take-home pay might go up to, say, $8,250.
Why Does a Taxable Wage Base Matter?
Taxable wage base is a term most often used in reference to Social Security taxes, though the concept can apply to any income-based tax. For example, some state unemployment agencies use a taxable wage base to calculate unemployment taxes.
The Social Security taxable wage base typically increases every year or every few years.