What are social security wages and how are they calculated?

In the United States, Social Security wages represent the portion of an employee's earnings subject to federal Social Security tax withholding, mandated under the Federal Insurance Contributions Act (FICA). Here's an overview of Social Security wages, including what they entail, how they're calculated, and key considerations:

What Are Social Security Wages?

Social Security wages encompass earnings deducted from employees' pay to fulfill the required federal Social Security tax obligations. These taxes are withheld regardless of an employee's eligibility for Social Security benefits. They comprise various income sources, such as hourly wages, salary, bonuses, commissions, and certain types of benefits.

Exclusions from Social Security Wages

Certain types of compensation are exempt from inclusion in Social Security wages and are not subject to FICA tax. These exclusions include disability payments beyond a specific qualifying year, employer contributions to retirement plans, reimbursed business travel expenses, payments to family employees below a certain age threshold, certain fringe benefits, and more.

Calculating Social Security Wages

To calculate Social Security wages, gross pay for a pay period is determined, and exclusions are subtracted to arrive at the taxable amount. For example, if an employee earns $2,000 in wages, $1,000 in commission, and receives a $15 tip, the Social Security taxable wages would be the total earnings minus the excluded tip amount.

Determining Social Security Wages Limits

The Social Security Administration sets limits on taxable income annually. In 2021, the maximum taxable income was $142,800, subject to adjustment for inflation. Once an employee's earnings reach this threshold, no further Social Security tax is withheld for that tax year.

Reporting Social Security Wages

Social Security wages are reported on Form W-2, alongside other income and tax-related information. This form serves as a tax statement for employees, detailing wages subject to income tax and Social Security tax. The information on Form W-2 helps employees file their tax returns accurately.