The taxable wage base, a.k.a. the Social Security wage base, is the tax ceiling on earned income that workers must pay for the Social Security tax.
When you work in the U.S., part of your federal taxes goes towards Social Security. Even if your tax home is abroad, allowing you to skip out on federal and state income taxes, if you’re still a U.S. citizen, you’ll likely have to pay taxes for Social Security. This is because it’s expected that you’ll one day be taking Social Security paychecks, rather than handing them out. Although, the program is running out of money as Baby Boomers are retiring in droves with a relatively skimpy workforce to support it.
Anyway, you only have to pay taxes up to a certain amount of your income, depending on what the taxable wage base is. In 2019, the taxable wage base was $132,900.
Let’s take a look at Maeby, a high-falutin movie exec. She made $500,000 in 2019, so she only has to pay Social Security taxes on her first $132,900. With a rate of 6.2% for Social Security taxes (another 6.2% of the taxable wage base is paid by her employer), she’s looking at a Social Security tax of $8,239.80.
Contrast this with Maeby’s personal waterboy, who gets paid $20,000 a year. He’ll be paying that 6.2% on his entire income, since it’s below the taxable wage base, which is $1,240.
Related or Semi-related Video
Finance: What is SEP?5 Views
Finance allah shmoop what is s e p or sepp
what's that i'm sorry we had to go there Think
simplified employee pension plan except it's basically a personalized pension
plan for business owners and is kind of a form
of an ira The company contribute some amount of money
to the sep and they get a tax deduction like
they can deduct that is just a normal expense of
running The business like engine is part of your normal
operating costs You're running a business That amount of money
is generally capped as a percentage of the total compensation
given to the employees And step is an obvious tax
deferment system for sole proprietors who can take advantage of
this delay in pink tax is a kind of way
to fund their own retirement The big catch here is
that what the big boss pays herself while she has
to pay to her employees as well Or rather she
has to contribute the same percentage to their set that
she has for her own compensation when the step is
finally distributed often decades later those distributions are then taxed
at normal ordinary income tax rates So yeah if you
own a small chain of dry cleaners shops specializing in
removing blood stains from clothing of mafia victims Well then
you probably have enough money where it makes sense to
set up your own set plan That way you can
defer income and taxes on that income to a much
later date when presumably your marginal tax rate will be
lower than it is today That is if today you've
earned two hundred grand and you're marginal tax rates forty
five percent then you only keep fifty five cents on
the last dollars that you earn But a couple of
decades from now well you might be retired having already
put your kids through assassins college and now instead of
needing one hundred sixty three thousand dollars a year in
net income after taxes while you live just fine on
fifty grand So as you distribute back to yourself you're
sepp which works just like that I remember instead of
paying forty five percent tax on that marginal dollar you've
distributed back to yourself Well now you only pay something
like twenty percent tax so you keep eighty cents on
those last dollars instead of only fifty five Well a
set plan highly encourages people to save for old age
or retirement The key differences between a normal ira and
accept well in a seth you the business owner are
the employer so only you contribute money to the sep
like in normal cos one of the big benefits the
company provides is matching a dollar for a dollar in
ira contributions So if you're saving five grand a year
into your eye right while your company with unlikely contribute
an additional five grand into it So yeah in a 00:02:43.75 --> [endTime] nutshell that is wass ab sip Maybe not Whoa
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