Social Security Wages (W-2)

Decoding Social Security Wages: Unveiling the Essentials

Understanding Social Security Wages

Defining Social Security Wages

Social Security wages encompass an employee’s earnings subjected to federal Social Security tax withholding (6.2% each for the employer and employee, as of the 2020 tax year). Even if the employee doesn’t anticipate Social Security benefits, employers must deduct this tax.

Inclusions in Social Security Wages

Social Security wages cover various components, including hourly and salaried wages, bonuses, commissions, tips exceeding $20 monthly, sick time, paid time off, payments in-kind (except for household or agricultural workers), and elective retirement contributions. The maximum taxable income limit for 2021 was $142,800.

Who Falls Under Social Security Wages?

According to the IRS, any employee in the United States, irrespective of citizenship or residence, is subject to Social Security wages. Totalization Agreements coordinate Social Security taxation for employees working in other countries, preventing dual taxation and coverage.

Distinguishing Social Security Wages from Gross Income

While Social Security wages and gross income often align, they aren’t synonymous. Gross income constitutes total compensation, while Social Security wages are a specific subset based on inclusions and exclusions.

Exclusions from Social Security Wages

Certain earnings are excluded from Social Security wages, including tips below $20 monthly, reimbursed business travel expenses, employer-paid health or accident insurance premiums, HSA contributions, retirement plan contributions, workers’ compensation benefits, family employees under 18 (or 21 in domestic work), some disabled worker wages, statutory non-employee payments, and nontaxable excess fringe benefits.

Are Tips Considered in Social Security Wages?

Yes, tips exceeding $20 monthly are included in Social Security wages. This encompasses cash tips, electronic tips, tip-sharing arrangements, and the value of non-cash tips.

Calculating Social Security Wages

To calculate Social Security wages, subtract exclusions from an employee’s gross pay. For example, if Simone earns $2,500 in gross wages, including a $15 tip, her Social Security wages are $2,500. The corresponding Social Security taxes to withhold ($310) account for both the employer and employee portions.

Mastering Social Security Wages: Navigating the Essentials with Precision