Taxable Wage Definition for Social Security Taxes

The federally administered Social Security program is funded by contributions from workers and their employers. Employers deduct the employee’s share from his wages and remit, along with the employer’s portion, on a periodic basis. Deductions are based on employee earnings subject to Social Security tax. Not all earnings are considered taxable wages for Social Security.

Earnings Limit

Wages beyond a certain amount each calendar year are excluded from Social Security tax. The cap changes from time to time, but for 2012 it was $110,100. Thus, the first $110,100 you earn during the year is considered taxable wages for Social Security. Once you reach that limit, your earnings are no longer subject to Social Security withholding.

Exclusions

You might have certain earnings that are excluded from your taxable wages before Social Security deductions are calculated. For example, if you participate in your employer’s group health insurance program, you may choose to have your premiums deducted prior to the calculation. Your contributions to a dependent care assistance program typically are not considered taxable wages for Social Security, either.

Reimbursements

If your employer requires you to account for your expenditures, allowances or per diems issued to you to cover your business expenses are not taxable income. An employer who has a nonaccountable plan includes those payments as taxable wages for income tax, Medicare and, if you have not yet reached your annual limit, Social Security taxes. Reimbursements for moving expenses and tuition assistance usually are not included as taxable wages for Social Security purposes.

Type of Employee

Certain employees may have earnings that are not taxable wages for Social Security. For example, children who work for their parents are exempt from Social Security until they turn 18; the age is 21 if the child is performing a domestic service. Wages paid to temporary emergency workers typically are not taxable wages for Social Security. Payments to partners in a business or statutory non-employees, such as some real estate agents, are not considered taxable wages.

Relation to Other Taxes

Earnings may not be taxable wages for Social Security, but they may be taxable wages for income tax or Medicare purposes. For example, the annual limit for Social Security wages does not apply to Medicare; all non-exempt payments you receive are subject to Medicare tax. Employer-paid adoption assistance is excluded from income tax, but not from Social Security and Medicare.

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