What Are Excess Wages and How Do They Affect Payroll Tax?

When individuals are employed, their earnings are subject to various payroll taxes that fund government programs. For certain taxes, there is a maximum amount of earnings that can be taxed annually. Earnings above this threshold are “excess wages,” which are no longer subject to specific payroll tax withholdings.

Understanding Excess Wages

Excess wages refer to the portion of an employee’s earnings that exceeds a predetermined annual limit, known as the “wage base” or “taxable wage limit,” for a specific tax. Once an employee’s cumulative gross wages for the calendar year reach this established wage base, any subsequent earnings above that amount are considered excess wages for that particular tax, and no further tax is withheld for the remainder of the year.

This mechanism means that an employee’s tax contributions for that specific tax cap out once their income reaches the wage base. For instance, if the wage base for a tax is $100,000, an employee earning $120,000 in a year would only pay that tax on the first $100,000. The remaining $20,000 would be considered excess wages, exempt from that specific tax.

Impact on Social Security and Medicare Taxes

Excess wages impact Social Security and Medicare taxes, which together form Federal Insurance Contributions Act (FICA) taxes. Social Security tax has an annual wage base limit. For 2025, the Social Security wage base limit is $176,100. Once an employee’s gross wages exceed this amount, no further Social Security tax is withheld from their earnings for the rest of the calendar year. The Social Security tax rate for both employees and employers is 6.2% on covered wages.

Medicare tax does not have a wage base limit; all earned wages are subject to the standard Medicare tax. The Medicare tax rate is 1.45% for both employees and employers on all covered earnings. An Additional Medicare Tax applies to high-income earners, imposed on wages exceeding a certain threshold, which is $200,000 for individuals and $250,000 for married couples filing jointly. Employers are required to withhold this additional 0.9% once an employee’s wages surpass $200,000, but employers do not pay a matching share for this Additional Medicare Tax.

Practical Implications and Overpayments

For employees, reaching the Social Security wage base limit affects their net pay. Once their cumulative earnings surpass the $176,100 threshold for 2025, their take-home pay increases as the 6.2% Social Security tax is no longer withheld. This adjustment continues for all pay periods until the end of the calendar year. The absence of this deduction can provide a welcome boost to an employee’s disposable income.

When an employee works for multiple employers within the same calendar year, each employer is required to withhold Social Security tax up to the annual wage base limit independently. This can lead to an employee overpaying Social Security tax if their combined earnings from all employers exceed the $176,100 wage base. In such cases, the employee can recover the overpaid Social Security tax by claiming it as a tax credit when filing their federal income tax return.

For employers, excess wages carry direct financial implications. Employers are only responsible for paying their matching 6.2% share of Social Security tax up to the annual wage base limit for each employee. Once an employee’s wages reach the $176,100 threshold, the employer ceases to pay their portion of the Social Security tax on further earnings within the same year. This cessation of employer contributions can result in reduced payroll expenses for businesses employing high-wage earners.