In the US, Social Security wages are an employee’s portion of earnings that are subject to federal Social Security tax withholding.
Social Security tax withholding equates to 6.2% for the employer and a matched 6.2% for the employee. It is one of two taxes employers must withhold under the Federal Insurance Contributions Act (FICA).
The other federal tax requirement is the Medicare tax withheld from Medicare wages. Medicare tax funds a portion of the Medicare insurance program to assist with health care and health insurance needs.
FICA taxes are determined by the Internal Revenue Service (IRS).
What are Social Security wages?
Social security wages are deducted from employees' earnings to constitute the required federal Social Security tax. FICA demands that employers deduct social security tax regardless of whether an employee qualifies for Social Security benefits or not.
Social Security wages include a range of income sources, including:
- Hourly and salaried wages
- Bonus payments
- Commission earned
- Tips exceeding $20 per month
- Paid sick leave (sick pay)
- Paid time off
- Payments-in-kind (with a few exceptions)
- Optional contributions to a retirement plan
What’s not included in Social Security wages?
Employee earnings comprise Social Security wages, but not all compensation types are included. The following compensation payments are exempt from being included as Social Security wages and are not subject to FICA tax:
- Some disabled workers' wages paid after the year that an employee qualified for disability insurance
- Employer contributions to a qualified retirement compensation plan
- Reimbursed business travel expenses that don’t exceed the specified government rate for per diems or the standard mileage rate (expense reimbursements include transport, meals, and tools)
- Payments made to family employees under age 18 (or 21 in the domestic work industry)
- Certain taxable fringe benefits
- Employee insurance
- Partnership payments
- Payments to statutory non-employees, such as direct sellers
- Tips under $20 a month
- Worker compensation benefits for employees who get injured or ill on the job
- Employer-paid health or accident insurance premiums
- Employer health savings account (HSA) contributions
How to calculate Social Security wages
FICA tax is calculated on an employee’s gross pay period. The above exclusions are subtracted from gross wages to determine Social Security wages.
First, the gross pay for a specific pay period is determined for salaried and hourly workers. Next, gross pay is used to calculate wage amount withholding for federal and state income taxes and Social Security and Medicare Taxes.
Subtract exclusions from the employee’s gross pay amount to determine an employee’s Social Security wages.
For example, Louie works as a retail salesman and earns $2,000 in hourly wages. In the most recent pay period, he also earned $1,000 in commission, increasing his earnings to $3,000. One customer was so impressed by Louie’s service that they tipped him $15, below the included amount needed to be included in Social Security wages.
Louie’s Social Security taxable wages are determined as follows.
($2,000 + $1,000 + $15) - $15 = $3,000
Social Security tax is calculated from his Social Security wages as follows.
($3,000 x 6.2%) x 2 = $372
The employer and employee pay the total Social Security tax in two equal parts.
How to determine Social Security Wages
Certain guidelines determine how much can be deducted from an employee’s income for Social Security wages.
In 2021, the maximum taxable income was $142,800 for employees and self-employed individuals. As the Social Security wage base is indexed for inflation, this limitation is adjusted yearly to accommodate inflation.
Once an employee reaches this taxable income limit, no more Social Security tax is withheld for the tax year.
Social Security wages are used by the Social Security Administration to determine the amount of Social Security benefit received after retirement and are subject to the Social Security component of FICA tax.
How do you calculate Social Security wages on W-2?
In addition to documenting an employee's social security number, the cost of employer-sponsored health coverage, and total earnings; the W-2 form also specifies Social Security wages and serves as a tax statement.
An employee’s W-4 Form guides the employer on how much money to withhold for federal income tax. Overall, the total amount of money reserved for FICA taxes totals a 15.3% tax rate of the employee’s gross pay. The cost is shared equally by employees and employers.
The information must also be recorded on the Form W-2, which employees use to file a tax return at the start of each calendar year. It reports total wages subject to income tax and Social Security wages.
Form W-2 lists payments that must be included for federal income tax purposes. A detailed list of payments is outlined in IRS Publication 15 (Circular E).
Two sections on Form W-2 should be considered:
- Box 1, which includes wages, tips, and other compensation that is taxable to the employee for federal income tax purposes
- Box 2, which determines Social Security wages that are subject to Social Security tax
The Social Security Administration uses box 2 to calculate Social Security benefits. Take note that the payment of deferred compensation is reported on Form W-2
Certain sections add more information. For example, Code C summarizes the taxable cost of group-term life insurance over $50,000 and provides information about elective deferrals to designated Roth contributions and retirement plans. Other sections, such as Code E and Code G, outline other deferrals and contributions.
Common questions about Social Security wages
There are different moving parts to remaining compliant for a remote team . The following answers to frequently asked questions offer clarification.
What is the difference between wages and Social Security wages?
Social Security wages are not the same as gross income, even if the amount appears identical.
Gross income is the total compensation owed to an employee. The amount of taxes and withholdings are calculated according to this amount.
Social Security wages are determined by gross income but consider inclusions and exclusions.
What is the difference between Social Security wages and federal income tax withholding?
A few payments are exempt from federal income tax withholding but taxable as Social Security wages.
Income tax withholding payments include wages paid by a parent to a child, payments made to statutory non-employees, and apply to all earnings.
The following payments are exempt from FICA tax withholding:
- Wages paid by a parent to a child younger than 18 (or 21 for domestic workers)
- Payments to statutory non-employees
- Earnings beyond a stipulated amount are not taxed for Social Security
Who is subject to paying Social Security wages?
The IRS stipulates that any employee of the United States is subject to Social Security wages, regardless of the citizenship or residence of the employer and employee.
There is one exception based on the Totalization Agreements. When employees work in another country, their Social Security wages may be impacted by coverage with other countries to remove dual taxation and coverage.