If employees come to you at the beginning of the year asking, “Why does my paycheck look smaller than the one I got in December?”, welcome to one of January’s most predictable payroll questions. In many cases, the answer has nothing to do with a pay cut or payroll error.
Why January Payroll Looks Different Every Year
This usually happens because of how Social Security taxes work. There’s a yearly dollar limit on how much of an employee’s pay gets taxed for Social Security—in 2025, the limit was $176,100 and in 2026 it rises to $184,500.
Here’s what it means in practice: Once an employee earns more than the limit during the year, Social Security taxes stop coming out of their paycheck for the rest of the year. Their take-home pay goes up a bit, and your company’s payroll tax expense drops.
But on January 1, the clock resets to zero. Social Security taxes start being taken out again, which means the employee’s take-home pay goes back down and your payroll taxes go back up—even though nobody got a pay cut.
This yearly limit is called the Social Security wage base, and it typically increases each year to keep up with wage growth. The reset is completely normal and expected, but it’s the main reason January paychecks look smaller even when nothing about an employee’s actual compensation has changed.
Who Notices This the Most
Higher-earning employees are far more likely to see this change. If someone makes $200,000 a year, they’ll hit the Social Security wage base sometime around September or October. Their November and December paychecks will be slightly larger because Social Security tax stops. Then January hits, and their paycheck drops back down.
From a payroll perspective, this is expected and means the system is working exactly as intended. But employees who don’t understand the wage base often think there’s been a mistake or that they got an unexpected pay cut.
What Employers See on the Payroll Side
Employers pay a matching portion of Social Security tax, so the wage base reset affects payroll costs as well as employee net pay. When Social Security taxes restart in January, employer payroll tax expenses increase accordingly until employees reach the annual wage base again.
This is one reason many businesses see higher payroll tax costs early in the year, followed by stabilization later on. Planning for this seasonal pattern can help avoid budget surprises, especially for businesses with highly compensated employees.
Other Wage Base Resets Happening at the Same Time
While the Social Security wage base tends to get the most attention, it isn’t the only payroll tax with an annual limit.
Medicare
Medicare works a little differently than Social Security. There’s no annual wage cap for Medicare tax, so it’s withheld from every paycheck all year long.
However, there is an extra Medicare tax that kicks in once an employee’s Medicare wages go over $200,000 in a calendar year. When that happens, their Medicare withholding increases for the rest of that year.
Just like Social Security, though, the calendar reset matters.
If an employee reached that $200,000 threshold in 2025, their Medicare tax rate will drop back to the standard rate in January. It stays there until their year-to-date earnings once again exceed $200,000 in 2026—at which point the additional Medicare tax resumes.
So if a high-earning employee notices a slightly higher net paycheck early in the year, this reset is often the reason. It’s temporary, expected, and tied entirely to annual earnings.
Federal Unemployment Tax Act (FUTA)
The Federal Unemployment Tax Act (FUTA) wage base applies to the first $7,000 of each employee’s wages per year. FUTA is paid by employers, not withheld from employee paychecks, but it resets every January and contributes to higher employer payroll costs early in the year. Most employers receive a state unemployment tax credit that reduces the effective FUTA tax rate, lowering the amount actually owed on that wage base.
The IRS outlines current FUTA requirements and rates on its official guidance pages.
State Unemployment Insurance (SUI) and Paid Family & Medical Leave
State Unemployment Insurance (SUI) and Paid Family & Medical Leave (PFML) wage bases also reset annually, though the amounts vary by state and may change from year to year. State labor or revenue agencies publish updated wage base limits each year, and these resets follow the same January pattern.
How to Explain January Payroll Changes to Employees
When wage bases reset, employees may notice lower net pay due to Social Security tax restarting, and higher payroll tax expenses early in the year. Employees don’t need a lesson in tax law; they need reassurance.
A clear, simple explanation usually does the trick. Let employees know this is not a pay cut or payroll error; payroll taxes reset every January.
Many employers include a short reminder in year-end communications or January payroll notices to get ahead of the issue.
How CommPayHR Supports Employers Year-Round
If January payroll changes spark questions from employees, you don’t have to figure them out on your own. At CommPayHR, we help employers understand what’s happening behind the scenes and explain it to employees in plain, straightforward terms. If you’re looking for a payroll partner who is hands-on and easy to talk to, schedule a consult with us and let’s discuss how we can support your business.
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