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Payroll Departments Should Get Ready for Wage Base Increase

The annual Board of Trustees of the Social Security Trust Fund report was issued earlier this year (2016). In that report are wage base projections through 2025, projections that suggest the wage base will increase to as much as $190,200 over the next nine years. While no one knows for sure how high the wage base will go, payroll departments should get ready for the increase we already know is coming for next year.

Are you a small business owner still handling payroll in-house? If so, changes in the wage base may be the motivation you need to consider online payroll services for small business. A third-party payroll provider streamlines the payroll process and takes all the headaches out of compliance.

An Explanation of Wage Base

Formally known as the Social Security Wage Base (SSWB), the wage base is the maximum gross income to which social security taxes may be applied. Social Security taxes are collected in order to pay the benefits of retirees.

When calculating payroll, the employer must consider a worker’s total gross income as it relates to the wage base. For purposes of illustration, consider the 2010 wage base of $106,800. Social Security taxes at that time were assessed at 6.20%. Both employer and employee paid the same rate.

An employee with a total gross income of $10,000 would pay $620 in social security tax; his/her employer would pay the same amount. Likewise, a worker with a total gross income of $110,000 would also pay social security taxes. But he/she would pay an effective rate of 6% because only $106,800 of his/her income would be subject to social security taxes. The remaining $3,200 would be exempt.

If this all seems confusing to you, you are not alone. Wage base calculations are just one reason companies choose to contract with payroll services for small business. They are content to let payroll professionals deal with social security taxes rather than having to figure it out themselves.

Future Wage Base Increases

Getting back to the main topic at hand – the government’s annual report and the wage base increase – it is interesting to note why the wage base tends to go up from year to year. In simple terms, it has to do with the current state of the Social Security program and whether estimates indicate there will be enough money in the system to pay future obligations.

The government projects the wage base using three sets of assumptions. What the actual wage base will be is not known until a final decision is made near the end of the current year. Wage base numbers for 2017 are expected to be announced in October. Having said that, the three sets of assumptions are high-cost estimate, intermediate estimate, and low-cost estimate.

Estimates are based on what the government thinks it will need to maintain social security payments in that year. If the social security program is as expensive as they believe that it might be by 2025, the wage base could be set at $190,200. If their expectations come in at the low end, the 2025 wage base might be closer to $160,000.

Knowing the annual wage base is necessary in order to withhold and pay the right amount of social security taxes. As complicated and confusing as it might be, social security taxes are an essential part of payroll processing. Small business owners either learn to do it, or they hire someone to do it for them. Contracting payroll services for small business is just one way of addressing the issue.

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