What is a Social Security Wage Base?

Jessica Ellis
Jessica Ellis

Social Security is a United States federal program that guarantees income to retired workers. By paying Social Security taxes throughout a career, a person becomes eligible for income payouts upon reaching retirement. The annual taxes each person pays into the system is based on a percentage of his or her income. The Social Security wage base is the maximum amount of yearly income subject to Social Security taxes; people earning more than the Social Security wage base do not usually have to pay this type of tax on the excess income.

A Social Security benefits application.
A Social Security benefits application.

Each year, the US government may implement changes to the Social Security wage base. The decision to do so is often based on the state of the economy; in a recession, for example, the wage base may be frozen to allow people to keep more of their earned income. Since the inception of the wage base program, however, the rate has never gone down. By the middle of the 21st century, some economists forecast that the wage base will raise up to 40% above levels at the turn of the century.

Between 2009-2011, the wage base level has been frozen at $106,800 US dollars(USD). Income earned over this amount is not taxed for Social Security, though it may be taxed for programs such as Medicare as well as other income taxes. A new law in 2011, called the 2011 Payroll Tax Cut, further reduced employee contributions to Social Security to a maximum of 4.2% of the wage base, while requiring employers to stay at the same previous contribution rate of 6.4%. People who are self-employed also benefit from this tax cut, with a maximum taxable rate of 10.6%. The 2011 Payroll Tax Cut is not likely to become a permanent law, however, and may be in effect for only one year.

One complicated issue regarding the Social Security wage base involves people who work more than one job. If a person makes $70,000 USD at one job, and $40,000 USD at another, he or she will be taxed to the maximum amount at both jobs, even though the total income exceeds the wage base by $3200 USD. For the employee, this discrepancy can be rectified when filing income tax forms for the year, but employers may not have a way to avoid making the maximum contributions for the employee.

While it may seem somewhat unfair that people making less than the wage base limit pay a higher percentage of their income in taxes than those that earn more than the limit, some economists argue that the system is fair. People that make more than the wage base do not receive higher Social Security benefits, and may be under more pressure to maximize personal savings. Nevertheless, with the Social Security system viewed as being in peril of bankruptcy, and with most American workers making far below the Social Security wage base cap, arguments are often put forth for a major increase of the wage base limit.

Jessica Ellis
Jessica Ellis

With a B.A. in theater from UCLA and a graduate degree in screenwriting from the American Film Institute, Jessica is passionate about drama and film. She has many other interests, and enjoys learning and writing about a wide range of topics in her role as a wiseGEEK writer.

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