According to a recent announcement from the Social Security Administration, the wage base used to calculate Social Security tax will rise to $160,200 for 2023 (from $147,000 for 2022). There is no Social Security tax on wages or self-employment income above this threshold.
Fundamentals of Social Security
Employers, employees, and self-employed individuals are all subject to two taxes under the Federal Insurance Contributions Act (FICA). One is for Social Security, often known as the Old Age, Survivors, and Disability Insurance program. The other is for Medicare, also referred to as the Hospital Insurance program. The amount of compensation subject to Social Security tax has a cap, but Medicare tax has no cap. The FICA tax rate for employers is 7.65% for 2023, with 6.2% going toward Social Security and 1.45% going toward Medicare (the same as in 2022).
2023 updates
For 2023, an employee will pay:
• 6.2% Social Security tax on the first $160,200 of wages (6.2% of $160,200 makes the maximum tax $9,932.40), plus
• 1.45% Medicare tax on the first $200,000 of wages ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return), plus
• 2.35% Medicare tax (regular 1.45% Medicare tax plus 0.9% additional Medicare tax) on all wages in excess of $200,000 ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return).
For 2023, the self-employment tax imposed on self-employed people is:
• 12.4% Social Security tax on the first $160,200 of self-employment income, for a maximum tax of $19,864.80 (12.4% of $160,200), plus
• 2.9% Medicare tax on the first $200,000 of self-employment income ($250,000 of combined self-employment income on a joint return, $125,000 on a return of a married individual filing separately), plus
• 3.8% (2.9% regular Medicare tax plus 0.9% additional Medicare tax) on all self-employment income in excess of $200,000 ($250,000 of combined self-employment income on a joint return, $125,000 for married taxpayers filing a separate return).
Employees with more than one job
What happens if one of your employees works for your business and has a second job? Taxes would be deducted from that employee’s wages by two different employers. Once the employee hits the pay base threshold, can they request that you stop deducting Social Security tax? Regrettably, no. Even if the total withholding exceeds the annual maximum, each employer is required to deduct Social Security taxes from the employee’s pay. Fortunately, any excess withheld will be credited on the employee’s tax return.
Thinking Ahead
Contact us if you have questions about 2023 payroll tax filing or payments. We can help ensure you stay in compliance.