For the Old Age, Survivors and Disability Insurance tax or Social
Security tax in the United States, the Social Security Wage Base 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 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. 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, 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, with similar employer matching. In the cases of the
$110k and $1m earners, each paid the same amount into the social security
system, and both will take the same out of the social security system.
Details 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. 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, because each employer may not know how much the
employee has already paid in Social Security tax in other jobs. The Social
Security tax coverage will be calculated on his or her personal return and any
excess is applied towards his or her Federal taxes. For example in 2010 an
employee works two jobs 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.
Of note, several occupations are exempted from the current cap with a far
lower cap, such as food service employees and domestic help employees.
Currently the cap is $6,500 in wages. Historical data
For the year 2010, the Social Security Wage Base was $106,800. In October 2010,
the Social Security Administration announced that the wage base would
remain unchanged for 2011. Since 2000, the SSWB has been:
(*) 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 in 2012 is
reduced to $4,624.20, but the maximum employer share remains at $6,826.20.
Effectively, this was a 4.2% rate charged to the employee, and 6.2% rate
to the employer. This resulted in an approximately 40/60 split but reduced
the total contribution. See here for a complete historical list of the Social
Security Wage Base. (**) Since 1990, the employer & employee
share has usually been 6.2% each for a 50/50 split of the 12.4% combined total.
The changes shown below applied In 2011 and 2012 when the rates were temporarily
lowered to 4.2% for the employee. In 2013, the employee rate returns to 6.2%
for a 50/50 split with the employer and a higher Maximum Contribution. For
self-employed people, the 2013 guidance from SSA indicates the full rate OASDI
is 12.4% for 2013. See footnote a. at 2013 SSA.gov link. Returning to the
traditional 6.2% OASDI employee share for 2013 effectively reduces take home
pay by 2% and increases the maximum OASDI contribution by the same amount,
returning it to traditional levels. The dip in the maximum OASDI contributions
for 2011 and 2012 causes the 2013 rate to appear as a spike, when in fact it is
a return to the levels imposed in the years 1990 through 2010.
= Employee Contribution changes in 2011 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 and 2012. The employer Social Security tax
rate and the Social Security Wage Base were not directly impacted by this act,
though they did change; 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. Use in pension plans
Because taxes and benefits are based only on earnings up to the SSWB, pension
plans can base contributions and or benefits in greater degree on earnings
above the SSWB or reduce benefits or contributions below the SSWB.
The pension compensation nondiscrimination laws(4)) require that
qualified pension plans not discriminate in benefits, rights and features in
favor of highly compensated employees. 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 of the SSWB. = Defined contribution plans =
Plans can contribute a higher percentage to base salaries above an integration
base. If that integration base is identical to the SSWB the contributions
may be double above the base not to exceed 5.7% for excess plans. For offset
plans the defined-contribution plan may base contributions on total base salary
and then reduce or "offset" the contribution rate for salary below the
integration base. If the integration base for such offset plans is identical
to the SSWB, then the reduction could be up to 5.7%.
= Defined benefit plans = For defined benefit plans the
integration base is a career average of the SSWB for each year of the worker's
career, which in pension law is called "covered compensation" base. Under
pension law, the SSWB may not be projected to increase in the future so a
new hire's covered compensation base would contain all future years at the
current year's SSWB. Excess and offset plans also exist for defined-benefit
plans. Notes
External links Go Ahead and Lift the Cap, article by
economist John Miller on raising the SSWB, Dollars & Sense magazine,
March/April 2008