6: Taxable Wages – Part 2 of Federal Payroll Tax Series

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How do you calculate the taxable wage basis for each Federal payroll tax type?  

This is the second episode of a six-part series on Federal payroll taxes. If you haven’t listened to the first episode in the series I would recommend that you go back and listen to episode 5.

Would you like to know the three steps to arriving at the taxable wage basis for each federal tax type? Sounds exciting, right? How about a quick and simple lesson on how money is created?


  • Wages: cash payments
  • Compensation: non-cash payments
  • Basis: generally includes all payments for services preformed regardless of the form that they take or what you call them
  • Employer Tax Guides:
    • Publication 15: Circular E – Employers Tax Guide
    • Publication 15a: Employers Supplementary Tax Guide

How to Arrive at the Correct Basis

  • Step 1 – Identify taxable wages and compensation
  • Step 2 – Subtract the deductions that reduce the taxable basis
  • Step 3 – Apply the wage limits

Wage Base Limits

  • Social Security = $118,500 (for 2016)
  • Federal Unemployment Tax (“FUTA”) = $7,000
  • Federal Income Tax (“FIT”) = NO LIMIT
  • Medicare = NO LIMIT

The government can’t live within its means so here is how they pay for their frivolous spending…

  • Step 1 – The Federal government creates an I.O.U. (a Bond) and gives to U.S. Treasury.  This represents debt that has to be repaid with future taxes that must be extracted from us and our children.
  • Step 2 – The U.S. Treasury sells the Bond to the Banks.
  • Step 3 – The Banks don’t have enough buyers for these Bonds, since there are not enough suckers left in the world to buy them, so they sell them to Federal Reserve at a profit.
  • Step 4 – The Federal Reserve does not have enough currency to buy the Bonds so they create new currency and use that to pay the Banks.

About the author, Thomas

I have 20 of years insurance industry experience in C-level management, focusing on all aspects of workers compensation, risk management, loss control, employee benefits, HR, payroll and professional employer organization (“PEO”) operations. Currently, I am the owner and CEO of Humanly HR, and founder and host of SmallBiz Brainiac; a podcast providing employer intelligence to small business owners.

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