Taxable Wage Base: What It Means for Employers

What it means in practice

What a wage base is. The IRS describes the wage base limit as "the maximum wage that's subject to the tax for that year." The idea recurs across payroll: a tax applies to each dollar an employee is paid until year-to-date pay reaches the base, and the excess is not taxed. Most bases are measured per employee, per employer, per calendar year, and pay above a base is often called excess wages. Washington's Employment Security Department puts it simply: you report excess wages, but you do not pay taxes on them. Form 940 works the same way, with a line for payments over the $7,000 FUTA wage base. Rates and filing rules for each tax are on the pages for Social Security tax, the Federal Unemployment Tax Act and state unemployment tax.

Which taxes have one. At the federal level, IRS Topic 751 states that only the Social Security tax has a wage base limit within FICA, and that there is no wage base limit for Medicare tax. FUTA has its own $7,000 base under 26 U.S.C. 3306(b)(1). Railroad employers apply two bases under the Railroad Retirement Tax Act. Each state sets its own unemployment base, and states with disability or leave programs decide whether those contributions are capped at all.

How bases are set. The Social Security base is indexed. The SSA notice for 2027 says it is set by a formula in section 230 of the Social Security Act tied to the national average wage index, and that it "serves as the maximum annual earnings on which OASDI taxes are paid" and is also the maximum used to figure benefits. The FUTA base is fixed in the statute. The Department of Labor's Comparison of State UI Laws traces it from $4,200 in 1972 to $6,000 in 1978 and $7,000 in 1983, "where it stands today." State bases vary: DOL says almost all states use a higher base than $7,000, some adjust it automatically, generally each year, most often by indexing it to the state's average annual wage and sometimes by tying it to trust fund balances, and most would raise their base automatically if Congress raised the FUTA base.

The January 1 reset and the paid-date rule. Every base discussed here applies to a calendar year, so each employee's counter starts again at zero on January 1. The FUTA regulation at 26 CFR 31.3306(b)(1)-1 adds that the limit relates to remuneration paid during a calendar year, "and not to the amount of remuneration for employment performed in any one calendar year." In its example, pay for 1955 work that was paid in 1956 counted toward the 1956 limit. The regulation still shows the older $3,000 figure; the statute now says $7,000. The Social Security regulation follows the same paid-date principle, explained on our Social Security wages page.

One base per employer. The FUTA regulation says that when an employee is paid by more than one employer in a year, the limit applies to the pay from each employer, not the total from all of them. Its example is an officer of three corporations, each of which owes tax on the full $3,000 it paid (the base at the time) "whether or not such corporations are related." Publication 15, discussing part-time and short-term workers, says much the same for Social Security: it generally does not matter whether a worker has another job or has had the maximum withheld by another employer. Three exceptions combine employers. Under the successor employer rule, described next, a buyer counts the seller's earlier wages. Related corporations that employ the same person at the same time and pay through a common paymaster are treated as a single employer (Publication 15-A; the FUTA regulation points to 26 CFR 31.3306(p)-1 for the FUTA version). And Publication 15 applies a single Social Security base ($184,500) and a single FUTA base ($7,000) for 2026 to all wages a motion picture project employer pays a motion picture project worker in a year.

The successor employer rule. Sections 3121(a)(1) and 3306(b)(1) use nearly identical language, and the RRTA borrows it in section 3231(e)(2)(C). The FUTA regulation lists three conditions: the successor acquires substantially all the property used in the predecessor's trade or business, or in a separate unit of it, during the calendar year; the employee worked in the predecessor's business immediately before the acquisition and for the successor immediately after; and the wages were paid in that calendar year before the acquisition. The method of acquisition does not matter, and buying one store out of a grocery chain counts as acquiring a separate unit. For FUTA, the regulation requires both businesses to be employers for that year, and the Form 940 instructions allow the predecessor's payments to be counted only if the predecessor was required to file Form 940. In the Form 940 instructions example, a predecessor paid an employee $5,000 and the successor paid $3,000; the successor reports $8,000 in total payments, of which only $2,000 is taxable FUTA wages. Publication 15 adds that predecessor wages also count toward the $200,000 Additional Medicare Tax withholding threshold.

Medicare is uncapped, and the $200,000 figure is a threshold. Publication 15 says an employer must withhold a 0.9% Additional Medicare Tax from wages paid to an employee in excess of $200,000 in a calendar year, starting in the pay period in which wages pass $200,000 and continuing to year end. There is no employer share. Tax starts above that figure rather than stopping. Regular 1.45% Medicare tax continues on all wages. See Medicare wages and tips and FICA.

State unemployment bases. DOL's July 2026 table of significant provisions lists taxable wage bases from $7,000 up to $78,200. Examples include Alabama at $8,000, New York at $17,600, New Jersey at $44,800, Alaska at $54,200 and Washington at $78,200. DOL's Comparison notes that most states, though not all, count only remuneration that is subject to FUTA toward the state base, so the state and federal wage definitions can differ. The Form 940 credit worksheet asks for taxable state unemployment wages and notes that "state and federal wage bases may differ." How SUTA rates and credits work is covered on our SUTA page.

Where states differ: two unemployment examples. California (example): the Employment Development Department lists a taxable wage limit of $7,000 per employee, per calendar year, for unemployment insurance in both 2026 and 2027, and the same $7,000 limit for its 0.1% Employment Training Tax. Washington (example): ESD lists a taxable wage base of $78,200 for 2026, up from $72,800 in 2025, $68,500 in 2024 and $67,600 in 2023, and has announced $82,000 for 2027. ESD calculates it each year from average wages in Washington. Every state publishes its own figure.

Where states differ: disability and leave programs. California (example): EDD says Senate Bill 951 removed the taxable wage limit and the maximum withholding for State Disability Insurance effective January 1, 2024, so all wages are subject to SDI. The SDI withholding rate is 1.3% for 2026 and 1.4% for 2027. See CASDI. New Jersey (example) uses two bases at once. For 2026 the Department of Labor and Workforce Development lists $44,800 for unemployment insurance and workforce fund contributions by workers and employers and for employer temporary disability contributions, and $171,100 for worker temporary disability and family leave contributions. Workers pay 0.19% for TDI and 0.23% for FLI on the first $171,100, a maximum of $325.09 and $393.53, and family leave is financed entirely by workers. NJDOL lists $46,400 and $177,100 for 2027. More on state disability programs is on our SDI tax page.

Coordination with self-employment tax. A person who has both wages and self-employment income shares one Social Security base between them. Under 26 U.S.C. 1402(b)(1), self-employment income for the Social Security part of the tax excludes net earnings above the base minus the wages paid to the individual during the year, and those wages include RRTA compensation. On the 2025 Schedule SE, line 7 is the $176,100 maximum, line 8a subtracts W-2 Social Security wages and tips plus tier 1 railroad compensation, and the 12.4% applies to the smaller of net earnings or the remaining room. The 2.9% Medicare part applies to all net earnings (IRS Topic 554). The SSA notice says the 2027 base of $192,300 also applies to self-employment income earned in tax years beginning in 2027. See self-employment tax.

Railroad employers. Section 3231(e)(2) ties the tier 1 base to the Social Security base and computes the tier 2 base differently. The Instructions for Form CT-1 (2025) list a tier 1 base of $176,100 and a tier 2 base of $130,800. SSA's 2027 notice lists an old-law contribution and benefit base of $137,100 currently and $142,800 for 2027, and says the Railroad Retirement program uses it to determine certain tax liabilities.

Step by step for an employer. (1) List each federal and state payroll tax you owe and its base for the year. (2) Keep a separate year-to-date taxable wage total for each tax, because wage definitions can differ. (3) On each payday, tax only the part of the payment under the remaining room. (4) Use the pay date to assign payments to a year, and reset every counter on January 1. (5) Start a new hire at zero unless the successor employer or common paymaster rule applies. (6) Report excess wages where a form asks, such as Form 940, line 5. (7) Keep employment tax records for at least 4 years (Publication 15).

Example 1 (illustration): one California employee in 2026. An employee is paid $16,000 a month, $192,000 for the year, with no pre-tax deductions. The $7,000 FUTA base and the $7,000 California UI and ETT bases are all reached in the January paycheck, so no FUTA, UI or ETT is due on that employee for the rest of 2026. Social Security wages reach $176,000 after November, so December has only $8,500 of room: $527.00 is withheld, bringing the employee's total to $11,439.00. Medicare at 1.45% applies to all $192,000, or $2,784.00, and California SDI at 1.3% also applies to all of it, or $2,496.00. No Additional Medicare Tax is withheld because wages stay under $200,000.

Example 2 (illustration): the same pay in other states. If the employee in Example 1 worked in Washington, state UI would apply to the first $78,200: through April the employee has $64,000, so only $14,200 of the May paycheck is taxable and nothing after. In New Jersey, worker TDI and FLI would apply until wages reach $171,100: through October the employee has $160,000, so $11,100 of the November paycheck is subject to them and nothing after.

Example 3 (illustration): a job change versus an acquisition. An employee is paid $100,000 by Company A from January to June 2026 and $100,000 by Company B from July to December. If B is an unrelated new employer, it starts at zero: Social Security applies to all $100,000 it pays and FUTA to the first $7,000. The employee may be able to claim excess employee Social Security tax on their return, as our Social Security tax page explains. If instead B bought substantially all of A's business and kept the employee, B counts A's $100,000: Social Security applies only to the first $84,500 B pays, and if A was required to file Form 940, B owes no FUTA on this employee because A already paid more than $7,000.

Example 4 (illustration): wages plus a side business. In 2026 a person has $150,000 of Social Security wages and $60,000 of net earnings from self-employment after the 92.35% adjustment. Under section 1402(b)(1), the Social Security part applies to only $34,500 ($184,500 minus $150,000), or $4,278.00 at 12.4%, while the Medicare part applies to all $60,000, or $1,740.00 at 2.9%.

Question: Which year's base applies to a late-December paycheck paid in January? The base for the year the wages are paid. Under the paid-date rule, 2026 work paid on January 4, 2027 counts toward the 2027 base ($192,300 for Social Security).

This entry describes federal rules and selected state examples as of November 2026 and does not decide how any particular payment or worker is taxed.

Why it matters and common mistakes

How Remindax helps

Related terms

See all terms in Payroll Tax & Withholding or browse the full HR Glossary.