What Are Social Security Wages for FICA Tax?
Payments to Employees on Form W-2 and for Retirement Benefits
Before you calculate the withholding amount for Social Security, be sure you have the correct amount. Some payments to employees shouldn't be included.
Employers must withhold both Social Security and Medicare taxes (called FICA taxes) from all wages paid to both hourly and salaried employees. But some types of payments are exempt from FICA tax. This article discusses what wages are included in the calculation of Social Security wages and which wages are not included.
What Wages Are Subject to Withholding?
The IRS says that these FICA taxes are due on wages paid for "services performed as an employee in the United States, regardless of the citizenship or residence of either the employee or the employer." In other words, anyone working as an employee in the U.S. must have Social Security and Medicare tax withheld from wages.
At the time the employee is paid, the FICA tax is calculated on the gross pay of that individual. Here's how this works:
- The employee's gross pay is calculated for the pay period, depending on whether the employee is salaried or hourly.
- The gross pay amount is used to calculate withholding for federal and state income taxes, based on the employee's W-4 form.
- The gross pay amount is also used to calculate withholding for the FICA taxes.
The total withholding for FICA taxes is 15.3% of the employee's gross pay; the employee and the employer each contribute half. So the FICA withholding amount for the employee is 7.65% of gross income (6.2% for Social Security and 1.45% for Medicare).
Social Security wages are used by the Social Security Administration to determine Social Security benefit calculations at retirement, so it's important that these wages be calculated correctly.
Payments to Employees That Are Exempt From FICA Tax
This is a list of some of the most common types of payments to employees that are exempt from being included in wages subject to FICA tax. These include both Social Security wages and wages for Medicare purposes.
- Some disabled worker wages paid after the year the worker was entitled to disability insurance
- Employee business travel expenses reimbursed for amounts not exceeding the specified government rate for per diems or the standard mileage
- Family employees under age 18 (age 21 for domestic work)
- Some "excess" fringe benefits are exempt from the calculation. Fringe benefits are taxable "on an excess of the fair market value of the benefit over the sum of an amount paid for it by the employee and any amount excludable by law."
- Employee insurance
- Payments to partners of a partnership
- Employer contributions to qualified retirement plans
- Payments to statutory non-employees (such as qualified real estate agents and direct sellers)
- Tips under $20 a month
- Workers compensation payments
Payments to Employees That Must Be Included
In addition to wages and salaries paid, some other payments to employees must be included in Social Security wages. See the entire list in the general instructions for Form W-2.
Federal Income Tax Withholding vs. Social Security Wages
The list of payments to employees that are not included in FICA tax may be different from types of payments that are not included in income tax calculations. Some payments may be exempt from federal income tax withholding but taxable as Social Security wages.
Example 1: Wages paid to a child employed by a parent or by a partnership in which each partner is a parent of the child must be always be withheld for federal income taxes but these wages are not included in Social Security wages (up to age 18).
Example 2: Employer contributions to a tax-deferred retirement plan, like a 401(k) or a 403(b) plan for an employee, are not included in calculations for federal income tax
Wages Reported on Form W-2
You must report both (a) wages subject to income tax and (b) Social Security wages on the W-2 form you provide to employees in January of each year. These may be different amounts and they must be entered correctly on the W-2 form.
On the W-2 form:
Box 1, Wages, tips, other compensation: This is the amount that is taxable to the employee for federal income tax purposes. It's the amount entered on the employee's income tax form.
Box 3, Social Security wages: This is the amount used by the Social Security Administration to calculate Social Security benefits.
Tips are included in both wages subject to income tax and Social Security wages but are calculated separately and included in Boxes 7 and 8.
Do These Wages Affect Self-Employment Tax?
Self-employed individuals must pay Social Security and Medicare taxes, but in a different way from employees and their employers. These taxes, called self-employment taxes, are based on the net income of a business. The types of income that are included in Social Security wages are not relevant to self-employment taxes.
The types of payments that are included in and excluded from Social Security wages are complicated. There are many qualifications in the IRS regulations. This discussion is for general purposes only and should not be relied on as tax advice. Check with your tax professional before you attempt to calculate Social Security wages.
IRS. Publication 15 (Circular E). 15. Special Rules for Various Types of Services and Payments, Pages 38-42. Accessed oct. 5, 2019.
IRS. General Instructions for Forms W-2 and W-3. "Box 1-Wages, tips, other compensation." Pages 16-17. Accessed October 5, 2019.