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For the Old Age, Survivors and Disability Insurance (OASDI) tax or Social Security tax, the Social Security Wage Base (SSWB) is the maximum earned gross income or upper threshold on which a wage earner's Social Security tax may be imposed. The Social Security tax is one component of the Federal Insurance Contributions Act tax (FICA) and Self-employment tax, the other component being the Medicare tax. It is also the maximum amount of covered wages that are taken into account when average earnings are calculated in order to determine a worker's Social Security benefit.
In 2010, the Social Security Wage Base was $106,800 and the Social Security tax rate was 6.20% paid by the employee and 6.20% paid by the employer.[1] A person with $10,000 of gross income had $620.00 withheld as Social Security tax from his check and the employer sent an additional $620.00. A person with $110,000 of gross income in 2010 incurred Social Security tax of $6,621.60 (resulting in an effective rate of approximately 6% - the rate was lower because the income was more than the 2010 "wage base", see below), with $6,621.60 paid by the employer. A person who earned a million dollars in wages paid the same $6,621.60 in Social Security tax (resulting in an effective rate of approximately 0.66%), with similar employer matching. The Congressional Budget Office considers the employer share of taxes to be passed on to employees in the form of lower wages that would otherwise be paid and counts them as part of the employees’ tax burden.[2] Self-employed individuals pay the entire amount of applicable tax.
When an employee works for several different companies during a tax year his or her Social Security deductions could exceed the cap. The Social Security tax coverage will be calculated on his or her personal return and applied towards his or her Federal taxes. For example in 2010 an employee works 2 jobs (either concurrently or consecutively) paying $60,000 each. Since each employer calculates the social security taxes independently each employer will deduct 6.2% of the $60,000 employee’s salary, $3,720, for a grand total of $7,440 which exceeds the cap of $6,621.60 by $818.40. The over-payment would be entered on line 69 on the 1040 IRS Tax form and, assuming the employee didn’t owe any other Federal Taxes, refunded to the employee. The employers who each paid $3,720 will not get a refund since they are not aware that the employee overpaid in aggregate for the year and Social Security keeps the $818.40 overage. Even if they become aware of the overpayment there is no method to claim the overpayment.
For the year 2010, the Social Security Wage Base is $106,800. In October 2010, the Social Security Administration announced[3] that the wage base would remain unchanged for 2011. Since 2000, the SSWB has been:
| Year | Wage Base | Increase | Maximum Social Security Employer and Employee Shares | Maximum Total Contribution to Social Security |
|---|---|---|---|---|
| 2012 | $110,100 | 3.1% | $4,624.20** | $13,652.40 |
| 2011 | $106,800 | 0.0% | $4,485.60* | $11,107.20 |
| 2010 | $106,800 | 0.0% | $6,621.60 | $13,243.20 |
| 2009 | $106,800 | 4.7% | $6,621.60 | $13,243.20 |
| 2008 | $102,000 | 4.6% | $6,324.00 | $12,648.00 |
| 2007 | $97,500 | 3.5% | $6,045.00 | $12,090.00 |
| 2006 | $94,200 | 4.7% | $5,840.40 | $11,680.80 |
| 2005 | $90,000 | 2.4% | $5,580.00 | $11,160.00 |
| 2004 | $87,900 | 1.0% | $5,449.80 | $10,899.60 |
| 2003 | $87,000 | 2.5% | $5,394.00 | $10,788.00 |
| 2002 | $84,900 | 5.6% | $5,263.80 | $10,527.60 |
| 2001 | $80,400 | 5.5% | $4,984.80 | $9,969.60 |
| 2000 | $76,200 | $4,724.40 | $9,448.80 |
(*) The maximum employee share in 2011 is reduced to $4,485.60, but the maximum employer share remains at $6,621.60. (**) The maximum employee share for the first 2 months of 2012 is reduced to an annualised amount of $4,624.20. If the extension does not become full year, then this amount will rise [4]. See here for a complete historical list of the Social Security Wage Base.
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As part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 enacted on December 17, 2010, the employee Social Security tax rate is reduced from 6.2% to 4.2% for wages paid during the year 2011 only. The employer Social Security tax rate and the Social Security Wage Base were not changed by this act; only the employee's tax rate changes. This is reflected in the above table, showing the reduction from $6,621.60 to $4,485.60.
The pension compensation nondiscrimination laws (Internal Revenue Code Section 401(a)(4)) require that qualified pension plans not discriminate in benefits, rights and features in favor of highly compensated employees (in 2007, the threshold is $100K of 2006 gross pay including bonuses and overtime). Because Social Security provides a progressive benefit formula and stops taxation at the SSWB, pension plans may integrate benefits or contributions according to a wage base, frequently at a fraction (e.g. 50%) of the SSWB.
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