The payroll tax applied to employees’ income up to a certain limit is known as what?

The correct answer, taxable wage base, refers to the specific amount of earnings that are subject to payroll taxes for Social Security. Each year, the Social Security Administration establishes a limit on the income that is taxed for Social Security purposes, which is known as the taxable wage base. This mechanism ensures that individuals only pay Social Security taxes on income up to a specified threshold, while earnings beyond this limit are exempt from the tax.

Understanding the taxable wage base is important because it affects how much money is contributed to the Social Security system and, consequently, how benefits are calculated for recipients. There is a cap on how much income can be taxed, aligning with the notion that Social Security benefits are tied to your earnings, but only within this defined limit.

In contrast, average indexed monthly earnings (AIME) is a formula used to derive a person's benefit amount based on their work history and indexed earnings. The maximum wage limit refers to the upper limit on earnings that can be subject to Social Security taxes but is not the term used in formal tax contexts. Average monthly wage (AMW) is another metric used for calculating benefits but is distinct from the concept of taxable income limits for payroll tax purposes.