Rivermate | Product owner - Andrew Simon

Global Work Glossary

What constitutes the taxable wage base?

The taxable wage base is a US-specific tax term that represents the maximum amount of earned income on which an employee must pay social security taxes. Here's how to calculate it:

  1. Calculate Gross Wage: Start by calculating the total gross wage, which includes the employee's base salary, overtime, and any additional earned income like tips.
  2. Adjustments: Subtract any non-taxable wages (e.g., insurance premiums, child support payments) and pre-tax deductions (e.g., retirement contributions) from the gross wage. Then, add any employer-provided fringe benefits.
  3. Determine Taxable Wage Base: The remaining amount after adjustments is the taxable wage base, on which social security taxes will be calculated and withheld.

Here's an example calculation:

  • Gross Wage: $2,000 base salary + $400 overtime = $2,400
  • Adjustments: Deduct $400 for insurance and retirement contributions, then add $100 for an employer benefit = $2,100
  • Taxable Wage Base: $2,100

Using the IRS withholding rate of 6.2% for social security taxes, you would withhold $130.20 from the employee's wages.

It's important to note that there is a yearly maximum limit for social security and unemployment taxes. Once an employee's wages exceed this limit, no more tax is deducted on additional earnings. Additionally, this concept is specific to the US, and similar concepts with different names and thresholds may exist in other countries.

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