Social Security Wages (W-2)

What are “Social Security wages”? 

When we say Social Security wages, we are referring to the portion of the earnings of an employee that are subject to Social Security tax withholding of 6.2% for employee contributions and the same 6.2% for the employer’s share of contribution. 

Social Security and Medicare taxes are collectively called Federal Insurance Contribution Act (FICA) taxes. But for this article, we refer to Social Security separate from Medicare. 

What are some examples of Social Security wages? 

Here is a list of Social Security wages: 

• Hourly wages
• Salaried wages
• Bonuses
• Tips that are more than $20 per calendar month
• Commissions
• Paid time off
• Sick time
• Elective contributions to a qualified retirement plan
• Payments in-kind (in the form of goods, lodging, food, clothing, or services) except if the employee is a household worker or agricultural worker

Please note that Social Security wages and gross income are not the same. An individual’s gross income refers to the money that they earn in a specific period. Social security is based on an individual’s gross income. 

What are some examples of earnings that are not Social Security wages? 

The following is a list indicating common types of payments or compensation that are not Social Security wages. This means that they are exempt from Social Security tax. 

• Disabled worker wages that are paid after the year when the worker was determined to be entitled to collect disability insurance
• Wages paid to family employees who are under 18 years old or under 21 years old if domestic worker
• Employer-paid health or accident insurance premiums
• Employer health savings account (HSA) contributions
• Employer contributions to qualified retirement plans
• Tips that are under $20 per calendar month
• Payments to statutory non-employees like qualified real estate agents and direct sellers
• Reimbursed business travel expenses
• Worker’s compensation benefits
• Nontaxable excess fringe benefits

Whose wages are subject to Social Security?

According to the Internal Revenue Service (IRS), U.S. Social Security tax applies to payments of wages for work performed as an employee in the United States. This is regardless of citizenship or residence of the employer or the employee. 

Before starting work, the employer should be able to inform the employee regarding tax withholding and other important information. For those employees who work in another country, there are Totalization Agreements which the United States has entered into with several nations to prevent double taxation of income. 

Does Social Security tax apply to all the earnings of an individual?

No, it does not apply to all the earnings incurred by an individual. The Social Security tax limit for 2021 is $142,800. Compared with that of 2020 which was $137,700, the limit has increased by $5,100. With the current Social Security limit, this means that the highest Social Security tax that an employee can pay this year is $8,853.60. When an employee reaches the earnings limit for the year, no Social Security tax is taken for the remainder of the year. 

This Social Security tax limit also applies to self-employed individuals who must pay for both employer and employee share of Social Security tax. For employers and employees, it is best to be updated on the tax limit for the current year. 

Are all tips subject to Social Security tax? 

In general, tips are subject to Social Security tax because they are considered income. These include cash tips, tips charged from credit and debit payments, tips from tip-sharing or tip pooling arrangements, and noncash tips. 

However, they are subject to Social Security tax if the amount exceeds $20 per month. Anything less than $20 is not subject to Social Security. 

How do you determine Social Security wages? 

Keep in mind that gross income per se is not the same as Social Security wages. Some earnings are subject to Social Security tax (Social Security wages) and some are not. You can find out the Social Security wages by taking the employee’s gross pay and subtracting any compensation that is exempt from Social Security. 

Let’s have an example. Let’s say that Lily earns $2,500 in wages from her Marketing job. For this month, Lily earned $300 in commission as well as a tip that was $18. 

To find out the Social Security wages, take the sum of everything that Lily earned including her hourly wages, commission, and tip.

$2,500 + $300 + $18 = $2,818

As mentioned above, tips that are less than $20 are not subject to Social Security tax. This is not considered Social Security wage which means we shall have to subtract it. 

$2,818 - $18 = $2,800

Lily’s Social Security wages are $2,800. 

If you want to find out how much Social Security tax should be withheld, multiply 0.062 (6.2%) by the Social Security wages. 

$2,800 × 0.062 = $173.60

From this computation, Lily’s employer must withhold the employee share of 6.2% Social Security tax which is $173.60. Consequently, the employer must also contribute another $173.60 to account for the employer’s share of Social Security tax.