Social Security Wages

The earnings or salary of an employee subject to the withholding of the federal social security taxes are known as social security wages. According to the tax year 2020, 6.2% of social security taxes are deducted from each employee's pay, and 6.2% are deducted from each employer's pay. If an employee does not qualify for social security benefits, the employer may not pay them the full amount of social security wages.

What is Social Security Wages ?

Social Security wages are the portion of earnings that are subject to the FICA (Federal Insurance Contributions Act) tax. These wages are subject to the Social Security part of the FICA tax and are utilized by the Social Security Administration (SSA) to calculate retirement Social Security benefits. Both hourly and salaried employees' pay must have Social Security and Medicare taxes deducted by the employer. These two taxes are collectively known as FICA taxes.

Regardless of the citizenship or place of residence of either the employee or the employer, FICA taxes are required on earnings paid for services rendered as an employee in the United States, according to the Internal Revenue Service (IRS). Social Security and Medicare taxes must be at least partially withheld from paychecks for anybody employed in the United States.

For the year 2023, the maximum taxable income for Social Security pay, which includes wages from qualifying employees and/or self-employment income, is $160,200. In order to account for inflation, strengthen system finances, and provide fair benefits for higher salary employees, the maximum limit is subject to change each year. Be careful to check it each year.

Key Facts of Social Security Wages

  • Earnings that are subject to the Social Security portion of the FICA tax are known as Social Security wages. Not all forms of payment are Social Security-eligible wages.
  • Employers are required to contribute the same 6.2% of gross wages that employees pay towards Social Security.
  • As of 2023, only the first $160,200 of yearly compensation is subject to the Social Security tax. For the rest of the year, income above this wage base is tax-free.

How the Social Security Wage Base Works ?

The maximum amount of earned income that employees are required to pay Social Security taxes on is referred to as the "taxable base". In most cases, the employee's gross pay is the same as the taxable wage base. This calculation is normally done by the employer, who also deducts the appropriate amount of taxes from each employee's paycheck. The employee is still in charge of including the tax in their yearly tax return. The Social Security wage base is another name for the taxable wage base.

The tax on Social Security is 12.4%. Employers are liable for paying half of the tax, or 6.2%, while employees are accountable for the other half through payroll deductions. However, the Social Security tax is only levied on earnings up to a particular amount. Over the specified maximum amount of earnings, wages, salaries, and bonuses are not taxed. The cap is adjusted yearly to reflect changes in the index of the average national pay.

In 2023, $160,200 will be the highest annual income that is subject to Social Security taxes. This implies that any amount above these limits is exempt from Social Security taxes. Along with the Medicare tax, the Social Security tax is automatically taken out of employees' paychecks. Remember that the 2.9% Medicare tax has no upper limit, whereas the Social Security tax is applied up to the taxable wage base. As a result, it covers all of an employee's earnings.

On their W-2 form (the Wage and Tax Statement) every year, employees receive information about their taxable wage basis. The Internal Revenue Service and the employee each receive a copy of the W-2s that employers create on an annual basis. Your taxable pay base is essentially provided by Box 3 (Social security wages) on the 2023 form, which specifies the percentage of an individual's earnings that are due to Social Security tax. The amount of Social Security tax withheld is shown in Box 4.

Who is Subject to Social Security Wages ?

According to the IRS, any "employee in the United States, regardless of the citizenship or residence of either the employee or employer", is liable to Social Security wages. However, Totalization Agreements coordinate Social Security taxation and coverage with select nations in order to eliminate double taxation and coverage for employees who work abroad.

What is Included in Social Security Wages?

Social Security wages include :
  • Hourly wages and salaried wages
  • Commissions
  • Bonuses
  • Paid time off
  • Tips that exceed $20 per month
  • Sick time
  • Elective retirement contributions
  • Payments in-kind (goods, services, etc.), unless the employee is a household or agricultural worker.

What is Excluded From Social Security Wages ?

Some typical forms of employee compensation are not considered wages for Social Security purposes, they are exempt from FICA tax. The following sorts of earnings are not considered Social Security wages :

  • Some salaries paid to disabled workers beyond the year in which they were eligible to receive disability insurance.
  • Employee business travel expenditures are reimbursed up to the maximum government per diem rate or standard mileage rate.
  • Family workers under the age of 18 or over the age of 21 who perform domestic work are compensated.
  • Some "excess" fringe benefits are taxable on the difference between the benefit's fair market value and the total of the employee's payment and any legally permissible exclusions.
  • Employee insurance.
  • Payments made to a partnership's partners.
  • Contributions from employers to eligible retirement plans.
  • Payments made to statutory non-employees such direct sellers and qualified real estate agents.
  • Monthly tips of $20 or less
  • Employer health savings account (HSA) contributions
  • Workers compensation benefits

Additionally, the Social Security element of the FICA tax only taxes wages up to a specific annual maximum. The next year's earnings start to add up again towards this "wage base" on January 1.

Note :
The Social Security wage base is inflation-indexed, so a small annual rise is to be expected.

Social Security Wage Base for 2023

Social Security taxes are only deducted and contributed when an employee earns more than the wage base. The yearly Social Security pay base often changes each year, so keep up with it.

The Social Security wage base for 2023 is $160,200, an increase from the cap of $147,000 for 2022. If an employee earns more than the yearly pay base, no Social Security taxes should be withheld, and no further contributions should be made.

Not all employees will make more than what must be withheld. Continue year-round withholding and contributions if an employee does not satisfy this wage basis.

In 2023, the highest Social Security contribution is $9,932.40 ($160,200 x 0.062). If you withheld more than $9,932.40, you went over the wage base and had to pay your employee back. Keep in mind that the amount you deduct from each employee's pay is determined by their earnings.

How to Calculate Social Security Wages ?

Take the employee's gross pay amount and deduct any exclusions, such as reimbursed travel expenditures and HSA contributions, to get the employee's Social Security wages.

For example :

During her last pay period, Olivia made $2,500 in gross wages, which included $2,000 in hourly salary and $500 in commission. Then, a particularly gushing customer who would not back down from leaving her a $15 tip that would be deducted from her Social Security income.

You would determine her Social Security wages as follows :

($2,000 + $500 + $15) - $15 = $2,500

The wage amount used to determine how much Social Security taxes should be deducted from Olivia's paycheck is $2,500.

For example :

($2,500 x 6.2%) x 2 = $310

So, $310 will be deducted from Olivia's salary as Social Security taxes.

Note :
To take into account both the employer and employee halves of the tax, the tax rate to withhold is multiplied by two.

Where are Social Security Wages Reported ?

You must report both wages subject to Social Security wages and income tax on the W-2 form you provide to employees and file with the IRS in January of each year. These might different amounts and must be accurately entered on the employee's W-2 form.

Box 1 : The amount that is taxable to the employee for federal income tax purposes is listed as "wages, tips, other compensation". It's the sum that the employee reported on their income tax return.

Box 3 : The amount that is subject to the Social Security tax and is utilized by the Social Security Administration to determine Social Security payments is referred to as "Social Security wages".

Tips are calculated individually and are included in Boxes 7 and 8 of both Social Security wages and wages subject to income tax.

Frequently Asked Questions

What is the Social Security wage limit for 2023?
For 2023, the Social Security wage cap is $160,200.

Why does the Social Security wage cap rise annually?
The yearly Social Security Administration calculation of the national average salary index is used to automatically modify the Social Security wage cap each year.

What will happen to employees' net take-home pay as a result of the Social Security wage cap increase?
Starting in 2023, employees whose remuneration surpasses the existing $147,000 ceiling on taxable earnings may see a small drop in their net take-home pay as a result of the payroll tax change.

What is the FICA tax rate for employers and employees?
The 6.2% Social Security tax and the 1.45% Medicare tax make up the 7.65%, FICA tax rate for both employees and businesses.

What impact does the additional Medicare tax have on highly paid employees?
Highly compensated workers must have an additional 0.9% Medicare tax taken from their pay if they make more than $200,000 in a single calendar year.

What is the differences between Federal Income Tax Withholding and Social Security Wages ?
The list of employee payments excluded from FICA tax computations may differ from the categories of payments excluded from income tax calculations. Some payments might be subject to Social Security taxes even though they are not subject to federal income tax withholding.
There is a list of payments that must be included for federal income tax reasons in the instructions for filling out Form W-2. A comprehensive list of payments made to employees, along with information on whether they are liable to income tax or are Social Security earnings, can be found in IRS Publication 15 (Circular E).

Do Social Security wages affect the self employment tax? 
Self-employed people are obligated to contribute to both Social Security and Medicare in full. Since they are essentially their own employers, they are unable to share them with their employers. When imposed on independent contractors, sole proprietors, and other self-employed people, these taxes are known as self-employment taxes. They are based on a company's net income. Self-employment taxes are unrelated to the sorts of income that are covered by Social Security earnings.

Is Social Security wages and gross income are same?
Wages paid under Social Security do not equal gross income. While Social Security earnings and gross income are frequently equal, this is not always the case. The sum of all remuneration is referred to as gross income, from which taxes and other withholdings are deducted. Social Security benefits have precise inclusions and exclusions and are dependent on gross income.

What age does Social Security become tax free?
Once you reach full retirement age, which ranges between 66 and 67 depending on your birth year, your Social Security income may theoretically be tax-free. That only applies if they are your sole source of income, though. They are taxable at your ordinary income tax rate if your total taxable income is $25,000 or more ($32,000 if you're married and filing jointly).

Is tips are included in Social Security wages?

If tips total more than $20 per month, they are indeed counted towards Social Security wages. If not, they are not. Tips that count as Social Security wages include:
  • Cash tips from customers
  • Electronic tips (debit or credit card payments) from customers
  • The value of noncash tips (tickets)
  • All money earned from tip-sharing agreements

What is Social Security wages fund?
Social Security taxes are also used to cover the cost of running the program. There is money left over after covering expenses for administration and perks. The remaining funds are borrowed by the federal government from the Social Security fund. Interest on the borrowed money must be paid by the government. Social Security tax funds a number of things, including benefits for :
  • Survivors
  • Retired workers
  • Disabled workers’ dependents
  • Retired workers’ dependents