Social Security wages in the US are a specific part of an employee’s earnings that are subject to federal Social Security tax. This tax is essential for funding the Social Security program, which supports individuals with retirement, disability, and survivor benefits.
How are Social Security Wages Taxed?
Both the employer and employee contribute to Social Security. Each pays a tax rate of 6.2% on the employee's earnings, as mandated by the Federal Insurance Contributions Act (FICA). This contribution is alongside the Medicare tax, which supports the Medicare health insurance program.
Understanding the Social Security Wage Base
The Social Security wage base is a cap on earnings subject to Social Security tax. Adjusted annually for inflation, this cap ensures that earnings above a certain threshold are not taxed for Social Security. For example, in 2021, this limit was set at $142,800.
Inclusions in Social Security Wages
The wages considered for Social Security tax include:
- Hourly and salaried wages
- Tips exceeding $20 per month
- Paid sick leave
- Paid time off
- Certain in-kind payments
- Exclusions from Social Security Wages
Not all forms of compensation are subject to Social Security tax. Exclusions include:
- Some disability payments
- Employer contributions to retirement plans
- Reimbursed business expenses within certain limits
- Payments to family employees under a certain age
- Workers' compensation benefits
Calculating Social Security Wages:
Imagine an employee named Alex, who works as a software developer at xx company. In a particular pay period, Alex earns:
A salary of $4,000
A bonus of $500
Tips amounting to $30
To calculate Alex’s Social Security wages, we sum up these earnings and then subtract any applicable exclusions. In Alex's case, there are no exclusions, so his Social Security wages for that period would be $4,530 ($4,000 + $500 + $30).
The Social Security tax would be calculated as 6.2% of $4,530, equalling $280.86, which is matched by xx company as the employer.
Reporting Social Security Wages
These wages are reported on an employee's W-2 form, which differentiates between wages taxable for federal income tax and those for Social Security tax. The Social Security Administration uses this data to calculate future benefits.
Who is Subject to Social Security Wages?
Most US workers are subject to these wages, with some exceptions like certain government employees, members of specific religious groups, non-resident aliens, and students in work-study programs. International workers might have different considerations under Totalization Agreements.