Social security wages

Social Security wages in the U.S. are the portion of an employee’s earnings subject to federal Social Security tax withholding. These wages are part of the Federal Insurance Contributions Act (FICA) taxes, which consist of two components: Social Security tax and Medicare tax.

Social Security wages include:

• Hourly and salaried wages

• Bonus payments

• Commission earned

• Tips exceeding $20 per month

• Paid sick leave

• Paid time off

• Payments-in-kind (with few exceptions)

• Optional contributions to a retirement plan

Certain types of compensation are excluded from Social Security wages and are not subject to FICA tax:

• Wages paid after qualifying for disability insurance

• Employer contributions to retirement plans

• Reimbursed business travel expenses within government-specified rates

• Payments to family employees under age 18 (or 21 for domestic work)

• Certain taxable fringe benefits

• Employee insurance

• Partnership payments

• Payments to statutory non-employees (e.g., direct sellers)

• Tips under $20 a month

• Workers' compensation benefits

• Employer-paid health or accident insurance premiums

• Employer contributions to Health Savings Accounts (HSAs)

To calculate Social Security wages, follow these steps:

1. Determine gross pay: Calculate the total earnings for the pay period, including hourly wages, salaries, commissions, and other earnings.

2. Subtract exclusions: Deduct any payments not subject to Social Security tax from the gross pay.

Example Calculation:

Louie, a retail salesman, earns:

• $2,000 in hourly wages

• $1,000 in commissions

• $15 in tips (under the $20 threshold)

Louie’s Social Security taxable wages: [ \text{Social Security wages} = ($2,000 + $1,000 + $15) - $15 = $3,000 ]

Social Security tax calculation: [ \text{Social Security tax} = $3,000 \times 6.2% \times 2 = $372 ] (6.2% from the employer and 6.2% from the employee)

In 2021, the maximum taxable income for Social Security was $142,800. This limit is indexed for inflation and adjusted annually.

The W-2 form documents an employee's Social Security wages. Two important sections related to Social Security wages are:

• Box 1: Wages, tips, and other compensation subject to federal income tax.

• Box 3: Social Security wages subject to Social Security tax.

A sole proprietorship is the simplest and most common form of business structure in the U.S. It's an unincorporated business owned and operated by one individual, where there is no legal distinction between the owner and the business. This means the owner is entitled to all profits but also personally responsible for all business debts and liabilities.