How to Calculate Excess Wages for Payroll Taxes

Payroll taxes are a fundamental component of the tax system, impacting both employers and employees. These taxes are generally calculated as a percentage of employee salaries and wages. A key concept involves “excess wages,” which refers to earnings that exceed a specific annual limit for certain taxes. Understanding these limits, known as wage bases, is important for accurate tax calculation and compliance. This concept ensures contributions to social insurance programs are capped once an individual’s earnings reach a predefined threshold.

Understanding Wage Bases and Excess Wages

A wage base represents the maximum amount of an employee’s annual earnings subject to a particular payroll tax. Any wages earned above this limit are considered “excess wages” for that specific tax and are not subject to further taxation for that year. This limit ensures both employers and employees contribute up to a certain amount to social insurance programs without an unlimited tax burden on higher incomes. Different federal payroll taxes have distinct wage bases, which are often adjusted annually due to inflation and changes in the national average wage index.

The primary federal payroll taxes with wage bases are Social Security and the Federal Unemployment Tax Act (FUTA). Social Security tax, part of the Federal Insurance Contributions Act (FICA), funds old-age, survivors, and disability insurance. For 2025, the Social Security wage base is $176,100, meaning earnings above this amount are not subject to the 6.2% Social Security tax for either the employee or the employer. There is no wage base limit for Medicare tax, the other component of FICA, meaning all covered wages are subject to the 1.45% Medicare tax for both employees and employers. An Additional Medicare Tax of 0.9% applies to wages exceeding certain thresholds ($200,000 for single filers, $250,000 for married filing jointly, and $125,000 for married filing separately), which employers must withhold without a corresponding employer match.

FUTA provides funds for unemployment compensation benefits. The FUTA tax has a much lower wage base compared to Social Security. For 2025, the FUTA wage base is $7,000 per employee per year. The standard FUTA tax rate is 6.0% on these taxable wages. Employers typically receive a credit of up to 5.4% for timely state unemployment insurance (SUI) contributions, which can reduce the effective FUTA tax rate to 0.6%. Wages considered for these taxes generally include all forms of cash compensation, such as salaries, wages, bonuses, commissions, and severance pay.

The Calculation Process

Calculating excess wages involves determining the portion of an employee’s earnings that surpasses the applicable wage base for a specific tax. The fundamental formula is straightforward: Total Wages – Wage Base = Excess Wages. This calculation must be performed separately for each type of tax, considering their individual wage bases. For instance, if an employee earns $200,000 in 2025, their Social Security excess wages would be $200,000 – $176,100 = $23,900. These $23,900 in earnings would not be subject to Social Security tax.

Consider an employee who earns $100,000 from Employer A and then changes jobs, earning an additional $100,000 from Employer B within the same calendar year 2025. Each employer is required to withhold Social Security tax on the wages paid up to the annual wage base. Employer A would withhold Social Security tax on the full $100,000. Employer B, unaware of the employee’s prior earnings with Employer A, would also withhold Social Security tax on the full $100,000. In this scenario, the employee’s total wages ($200,000) exceed the $176,100 Social Security wage base, resulting in excess Social Security tax withholding. The employee would have overpaid Social Security tax on this $23,900.

For FUTA, the calculation is simpler because it is an employer-paid tax with a fixed, lower wage base. An employer calculates FUTA tax on the first $7,000 paid to each employee during the calendar year. If an employee earns $30,000 from a single employer in 2025, the employer would only pay FUTA tax on the initial $7,000 of those wages. Any earnings above $7,000 for that employee are considered excess wages for FUTA purposes and are not subject to this tax. This applies regardless of how much an employee earns beyond the $7,000 threshold.

Addressing Excess Tax Withholding

Employees who have had excess Social Security tax withheld, particularly those with multiple employers in a single year, can recover this overpayment. When an individual works for more than one employer during the year, each employer independently withholds Social Security tax up to the annual wage base, often leading to combined withholdings exceeding the maximum allowable amount. This overpayment does not apply to Medicare tax, as it has no wage base limit. The excess Social Security tax withheld can be claimed as a credit against the employee’s federal income tax liability.

To claim this credit, individuals should report the excess amount on their federal income tax return, typically Form 1040. This credit applies only when the excess withholding results from having two or more employers. If a single employer mistakenly withheld too much Social Security tax, the employee cannot claim this excess on their income tax return; instead, the employer is responsible for adjusting the overcollection and refunding the amount directly to the employee. If the employer does not make the adjustment, the employee may need to file Form 843 with the IRS to seek a refund.

For FUTA, since it is an employer-paid tax, employees do not directly deal with excess withholding. Employers are responsible for ensuring they do not overpay FUTA taxes by correctly applying the $7,000 wage base per employee. If an employer overpays FUTA tax, they would seek a refund or adjustment through IRS forms, such as Form 940 or Form 940-X.