Glossary of Human Resources Management and Employee Benefit Terms
Social Security wages are an employee’s earnings that are subject to federal Social Security tax withholding (6.2% for the employer and 6.2% for the employee for the 2020 tax year). Employers must deduct this tax even if the employee doesn’t expect to qualify for Social Security benefits.
Social Security wages include:
Hourly wages and salaried wages
Tips that exceed $20 per month
Payments in-kind (goods, services, etc.), unless the employee is a household or agricultural worker
Elective retirement contributions
Social Security wages have a maximum taxable income limit of $142,800 for the year 2021, which includes qualified employee wages and/or self-employment income. Be sure to check the maximum limit annually since it changes every year to adjust for inflation, improve the system’s finances, and provide reasonable benefits for higher wage earners.
When an employee reaches the earnings limit, no more Social Security tax is withheld for the year. At 2021 rates, $142,800 would require $8,853.60 (total for both the employer and the employee) to be withheld for Social Security taxes.
The IRS says employees who are subject to Social Security wages are any “employee in the United States, regardless of the citizenship or residence of either the employee or employer.”
However, for employees who work in another country, Totalization Agreements coordinate Social Security taxation and coverage with some countries to eliminate dual taxation and coverage.
Social Security wages are not the same as gross income. While the amount of Social Security wages and gross income are often identical, they just as easily may not be.
Gross income is the total of all compensation from which the amount of taxes and other withholdings are calculated. Social Security wages are based on the gross income and have specific inclusions (as listed above) and exclusions (as listed below).
The types of earnings (or compensation payments) that are excluded from Social Security wages include:
Tips (if they total less than $20 per month)
Reimbursed business travel expenses
Employer-paid health or accident insurance premiums
Employer health savings account (HSA) contributions
Employer contributions to qualified retirement plans
Workers’ compensation benefits
Family employees under the age of 18 (or under 21 in the domestic work industry)
Some disabled worker wages
Statutory non-employee payments
Nontaxable excess fringe benefits
Yes, tips are included in Social Security wages if they exceed $20 per month. Otherwise, they are not.
Cash tips from customers
Electronic tips (credit/debit card payments) from customers
All tips received through tip-sharing arrangements
The value of noncash tips (tickets, etc.)
To calculate an employee’s Social Security wages, take the employee’s gross pay amount and subtract any exclusions such as reimbursed travel expenses and HSA contributions (see exclusions listed above).
Simone earned $2,000 in hourly wages and $500 in commission during her last pay period, so she earned a total of $2,500 in gross wages. She then had a particularly effusive client who could not be talked out of giving her a $15 tip, which is going to be excluded from Social Security wages.
Here’s how you would calculate her Social Security wages:
($2,000 + $500 + $15) - $15 = $2,500
When it is time to calculate how much employer and employee Social Security taxes to withhold from Simone, $2,500 is the wage amount used.
($2,500 x 6.2%) x 2 = $310
Note: The reason the tax rate to withhold is multiplied by two is to account for both the employer’s and the employee’s portion of the tax.
So, $310 is the amount of Social Security taxes to be withheld from Simone’s paycheck.