Social Security wages are an employee's income that is subject to a federal  Social Security tax deduction ( 6.2% for the employer and 6.2% for the employee  for the 2020 tax year   ). Employers must deduct this tax even if the employee does not expect to be eligible for Social Security benefits.

Social Security pay includes:

• Hourly Wages and Salaried Wages
• Bonus
• Commissions
• Tip over $20 per month
• sick time
• paid time off
• Payment in kind (goods, services, etc.), unless the employee is a domestic or agricultural worker
• Optional Retirement Contribution

The maximum taxable income limit for Social Security wages for 2021   is $142,800, which includes qualified employee wages and/or self-employment income. Be sure to check the maximum limit each year as it changes each year to adjust for inflation, improve the system's finances, and provide fair benefits for higher wage earners.

When an employee reaches the earnings limit, no more Social Security taxes are withheld for that year. At 2021 rates, $142,800 would require $8,853.60 (total for both employer and employee) to be withheld for Social Security taxes.

The IRS says workers subject to Social Security wages  are any employee in the United States  , regardless of the citizenship or residency of the employee or employer.

However, for employees working in another country,  totalization agreements  coordinate social security taxation and coverage with certain countries to eliminate double taxation and coverage.

Social Security pay is not the same as gross income   . While the amounts of Social Security pay and gross income are often similar, they may not be exactly the same.

Gross income  is the sum of all compensation from which the amount of taxes and other deductions is calculated. Social Security wages  are based on gross income  and have specific inclusions (as listed above) and exclusions (as listed below).

The types of income that are excluded from Social Security wages (or compensation payments) include:

• Tips (if they total less than $20 per month)
• Reimbursement of business travel expenses
• Health or accident insurance premiums paid by the employer
• Employer  Health Savings Account (HSA)  Contributions
• Employer contributions to qualified retirement plans
• Workers' Compensation  Benefits
• Family workers under the age of 18 (or under the age of 21 in the domestic work industry)
• Pay for certain disabled workers
• Statutory non-employee payments
• Non-taxable additional  fringe benefits

Yes,  tips are included in Social Security wages if they exceed $20 per month.  Otherwise, they are not included.

Tips that count as Social Security wages  include:

• Cash tip from customers
• Electronic tips from customers (credit/debit card payments)
• All tips received through tip-sharing arrangements
• Value of non-cash tip (tickets, etc.)

To calculate an employee's Social Security wages, take the employee's gross pay amount and subtract any exclusions, such as reimbursed travel expenses and HSA contributions (see exclusions listed above).

For example:

Simone earned $2,000 per hour during her last pay period and $500 in commissions, so she earned a total of $2,500 gross pay. Then she had a particularly enthusiastic customer who couldn't be refused a $15 tip, which would be excluded from Social Security pay.

Here's how you'd calculate his Social Security wages:

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

When it came time to calculate how much Social Security tax the employer and employee should withhold from Simone, the $2,500 salary amount was used.

For example:

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

Note: The reason the withholding tax rate is multiplied by two is that it takes into account both the employer's and employee's tax share.

Therefore, $310 is the amount of Social Security tax that will be deducted from Simone's pay.