In 2023, the Social Security Administration (SSA) wage base will increase from $147,000 to $160,200. This new limit means employers can stop withholding Social Security taxes from employees' paychecks once their wages reach the new threshold.
As an employer, this change is essential for you to be aware of as you plan your budgets and staffing for 2023 and beyond, as any wages paid over the threshold will not be subject to Social Security taxes.
The Social Security Wage Base, also known as the contribution and benefit base, is the maximum amount of earnings subject to the Social Security portion of payroll taxes. These taxes help fund Social Security benefits, including old-age, survivors and disability insurance (OASDI) benefits.
This cap changes each year based on inflation. Because of the record inflation rates in 2022, the taxable maximum jumped from 2022 to 2023, increasing from $147,000 to $160,200.
Payroll Taxes: Cap on Maximum Earnings
Social security taxes are part of FICA taxes, or Federal Insurance Contributions Act, which is made up of the Social Security portion (also known as the OASDI tax rate) and Medicare taxes.
Social Security has a tax rate of 6.2%, and the Medicare portion has a rate of 1.45%, meaning employers must withhold a total of 7.65% from each employee's wages. In addition, employers pay a matching FICA contribution of 7.65%.
FICA Tax Rates (Social Security + Medicare)
| Classification |
FICA Tax Rate |
| Employee |
7.65%
(6.2% + 1.45%)
(+ 0.9% on wages over $200,000) |
| Employer |
7.65%
(6.2% + 1.45%) |
| Self-Employed Workers |
15.3%
(12.4% + 2.9%) |
One of the most important reasons to be aware of the cap is that it helps employers budget for their payroll costs. Knowing the maximum Social Security tax allows you to accurately plan how much money you need to set aside each year to cover your portion of payroll taxes.
Is There a Cap on Medicare Taxes?
There's no cap on the Medicare portion of the FICA tax rate, so employers are required to withhold the 1.45% Medicare tax on all employee wages, regardless of the amount. In addition, once an employee's annual wages exceed $200,000, the IRS requires employers to withhold the 0.9% Additional Medicare Tax.
Why Is the Social Security Wage Base Important?
The wage base is important for employers because it impacts how much employees' payroll taxes will be. For example, if an employee's salary is close to the maximum tax, their taxes will be higher than if their salary is significantly below the limit.
Giving a lower-wage employee a raise will increase their payroll taxes (and the matching taxes paid by their employer). On the other hand, giving a raise to an employee whose income exceeds the social security contribution and benefit base won't impact either the employee or employer portion of FICA taxes.
For this reason, both employers and employees should be aware of the taxable maximum so they can better understand how their taxes are calculated.
How to Use the Wage Base: An Example
Let's look at an example to see how this works in the real world. Say you employ a manager at your business who earns $150,000 per year. In 2022, only the first $147,000 of their wages were subject to Social Security, so you withheld $9,114 ($147,000 x 0.062) from their wages.
In 2023, the base is greater than their gross wages, so 100% of their wages are subject to Social Security taxes, and you must withhold $9,300 ($150,000 x 0.062) from their paycheck for Social Security. So even though the employee is making the same salary in 2023 as they did in 2022, their take-home pay is lower.
Employers pay Social Security taxes at a matching 6.2% of the employee's salary, up to the cap, so your expenses also increase.
How Will the New Limit Change How Employers Operate Their Businesses?
As an employer, it's important to be aware of changes in the SSA's maximum amount each year, as it impacts your total cost of hiring an employee and how much FICA tax you need to withhold from employee paychecks.
So as you approach budgeting for the new year, you need to know the 2023 taxable maximum to budget for payroll taxes and ensure you're not over-withholding on wages that exceed the limit.
It's also a good idea to inform your employees of the cap so they understand how their payroll taxes are calculated and whether they might pay more tax in 2023.
How Can Employers Prepare for New Changes to the Wage Base?
Employers can prepare themselves for the 2023 social security payroll tax changes by taking the following steps:
- Familiarize yourself with the coming changes, including the taxable limit increase and when you need to stop withholding.
- Budget for their payroll taxes accordingly, ensuring that they are not paying tax on compensation that’s over the limit. Or use a payroll service like Hourly so all of those calculations are handled for you.
- Inform employees of the cap so that they understand how their Social Security taxes are calculated.
- Take steps to ensure you comply with all relevant laws and regulations come 2023.
2023 Social Security Wage Base FAQs
When does the new wage base start, and when does it end?
The 2023 wage base will start on January 1, 2023, and end on December 31, 2023.
This means any taxable earnings for hours worked in 2022 are subject to the old cap of $147,000, even if you don't issue the paychecks until 2023.
New caps for the coming year are typically announced in mid-October, so the SSA will announce the cap for next year in October 2023.
Does the SSA wage base impact self-employed people?
Yes. The cap on Social Security taxes also applies to self-employed people.
The self-employment tax rate is 15.3% of self-employment income. This rate consists of 12.4% for Social Security (up to the cap) and 2.9% for the Medicare tax rate. Unlike employment taxes, which are withheld from an employee’s wages, self-employment taxes are paid along with self-employed workers’ federal income taxes and reported on Schedule SE of taxpayers’ individual tax returns.
What is the SSDI COLA for 2023?
For 2023, the SSA's cost-of-living adjustment (COLA) is 8.7%. This means if you receive Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI), your benefits will be 8.7% higher in 2023 than they were in 2022.
The COLA tracks changes in the consumer price index (CPI). Since there was a significant increase in consumer prices in 2022, the COLA for 2023 is much higher than in years past.
Be Prepared for the Year Ahead
As an employer, changes in payroll tax rates and limits can greatly impact your budget and processes. That's why it's essential to be aware of changes to the SSA's wage base.
If you handle payroll in-house, make sure your system accounts for the new cap or consider outsourcing your payroll to Hourly so all of the changes and calculations will be handled for you.
Now that you have the new limit for 2023, you're better prepared for the year ahead!
