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.
Taxable Wages Definition
A taxable wage refers to any income that is subject to taxation under the IRS's current laws. This includes your wages, bonuses, tips, commissions, back pay and other forms of money you receive in return for work you perform. Some income is nontaxable, including some types of retirement income and expense reimbursements.
On your paycheck, you'll see your total earnings listed as gross pay. This is the amount paid to you before nontaxable deductions are considered. Taxes are then taken out on the amount of your gross pay that isn't excluded from taxability, resulting in the net pay that goes into your bank account with each paycheck. In addition to income tax, your employer also takes out a FICA tax, which includes 6.2 percent for Social Security tax and 1.45 percent for Medicare. Your employer matches that amount, paying an additional 7.65 percent out of his own pocket. Those who are self-employed pay both parts of that tax.
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.
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, taxed Social Security earnings. Reimbursements for moving expenses and tuition assistance usually are not included as taxable wages for Social Security purposes.
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.
Exceptions for 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.
2018 Taxes and Earnings Caps
Wages beyond a certain amount each calendar year are excluded from Social Security tax. Starting in 2018, the amount of your earnings subject to Social Security tax increases to $128,400. Once you reach that limit, your earnings are no longer subject to Social Security withholding. You will, however, continue to pay the Medicare tax.
2017 Taxes and Earnings Caps
If you're still filing your 2017 taxes, you'll see $127,200 in taxable Social Security wages for that tax year. Any amount over that is subject only to the Medicare tax.
- Pay Stub image by Haris Rauf from Fotolia.com