What is the maximum taxable base? Why does it matter?

What is the maximum taxable base for Social Security? Why does it matter? 

Simply put, the wages and self-employment income of most people are covered by Social Security. Each year, people pay Social Security taxes based on that work up to the maximum amount set by law. This amount is the maximum taxable base. It has changed frequently over the years.  

A person’s best 35 years of earnings are used to compute their Social Security full retirement age (FRA) amount. With each new calendar year, a year of potentially higher earnings becomes available for use. Not only might their actual earnings be higher, but, depending on the maximum taxable base for that year, more earnings could be credited for use in the Social Security computation. 

To illustrate how earnings credited to a Social Security record can change with the taxable base; say a person earned $43,000 in each of 1985, 1986 and 1987. The maximum taxable base in 1985 was $39,600, in 1986 it was $42,000, and in 1987 it was $43,800. Although the amount of earnings in this example stays constant, amounts credited to the persons Social Security record change each year.  

For this example, 1985 earnings were above the maximum base of $39,600. Earnings that year were taxable for Social Security only to the maximum base amount so, for 1985, the worker had $39,600 credited to his or her Social Security record even though earnings were $43,000. Once earnings reached the tax base of $39,600, the person stopped paying Social Security payroll tax. 

For 1986, even though earnings in this example did not change from 1985, due to the higher taxable base, this year the higher earnings of $42,000 were credited to the work record. As before, the person stopped paying Social Security payroll tax once reaching the taxable earnings amount but more earnings became available for future computation of benefits. 

In 1987, for this example, the earnings of $43,000 were below the taxable maximum. The worker paid Social Security tax on all his or her earnings.  Due to the higher taxable base, earnings of $43,000 were credited to the work record. 

Due to changes in maximum taxable earnings, in this example three years of equal earnings became three different amounts credited to the workers Social Security work record, and available for use in determining future Social Security benefits. 

For 2012, the Social Security maximum amount of taxable earnings is $110,100. The maximum amount of taxable earnings for 2013 is $113,700.

Medicare payroll tax does not have a maximum taxable base limit. It continues for all applicable wage and self-employment income during the year even after Social Security tax ends.

 

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