Social Security wages refer to the portion of an individual’s earnings that are subject to Social Security taxes. In many countries, these taxes fund social insurance programs designed to provide benefits for retirees, the disabled, and their dependents. The specific structure and regulations can vary by country, but the foundational concept remains: workers and employers contribute a percentage of wages to ensure certain societal safety nets.
In the U.S., for instance, both employers and employees pay into the Social Security system, with a cap on the amount of wages that can be taxed annually. However, other countries might have different thresholds or rates. The nuances of Social Security wages in each nation reflect their unique socio-economic priorities and challenges.
How do you pay Social Security wages in the US?
In the US, Social Security wages are the earnings of an employee that undergo federal Social Security tax deductions.
The Social Security tax is split equally: 6.2% comes from the employer and another 6.2% from the employee. This tax, along with the Medicare tax, forms part of the Federal Insurance Contributions Act (FICA) taxes set by the Internal Revenue Service (IRS).
These wages are amounts taken from employees’ earnings to satisfy the federal Social Security tax requirement. Even if an employee doesn’t benefit from Social Security, employers still have to make this deduction under FICA rules.
Types of income subject to the Social Security wages
- Regular salaries or hourly pay
- Bonuses
- Commissions
- Tips over $20 monthly
- Paid sick leave
- Paid vacations
- Certain non-cash payments
- Contributions to some retirement plans
However, not all types of earnings are counted as Social Security wages. Exempt earnings include:
- Wages to some disabled workers after they qualify for disability benefits
- Employer’s contribution to certain retirement plans
- Approved business travel expenses
- Payments to young family workers (below 18 or 21 for household jobs)
- Some benefits, insurance, and payments to specific non-employees
- Tips less than $20 monthly
- Compensation for work-related injuries or illness
- Employer-covered health or accident insurance
- Contributions to an employer’s health savings account (HSA)
Calculating Social Security wages
To work out the Social Security tax, first determine the gross pay, then subtract any exclusions from it. Using this amount, apply the 6.2% tax rate for both the employer and employee.
For instance, if Mr. X earns $2,000 as a retail salesman and receives an additional $1,000 commission and a $15 tip, his total is $3,000. The Social Security tax on this amount would be $372, shared equally by Mr. X and his employer.
Setting Social Security wages limits
In 2022, the highest taxable income for Social Security purposes was set at $147,000. This limit adjusts annually (in 2021 it was set at $142,800), taking inflation into account. Once an employee earns more than this amount in a year, no more Social Security tax is taken for that year. The Social Security Administration uses these wages to decide on retirement benefits.
Recording Social Security wages on W-2 The W-2 form, a yearly tax statement, shows an employee’s Social Security wages, among other details. This form, based on the employee’s W-4 Form, reflects the taxes reserved for federal income and FICA taxes, totaling 15.3% of gross pay, shared equally between employer and employee.
Key sections on the W-2 form
- Box 1: shows taxable earnings for federal income tax
- Box 2: shows earnings that undergo Social Security tax. The Social Security Administration uses the amount in Box 2 to work out benefits.
Social security wages in Israel
Social security in Israel is managed by the National Insurance Institute (Bituach Leumi). It is responsible for collecting social security contributions and providing various social benefits to eligible residents. The system covers a range of services from old-age pensions, disability benefits, child allowances, unemployment compensation, and more.
The amount that workers and employers contribute to the National Insurance Institute is determined as a percentage of the worker’s salary. This is up to a certain ceiling or maximum, beyond which no further contributions are made. The rate and ceiling might vary based on changes in regulations or economic considerations. It’s essential to note that Israel’s social security system also provides benefits for those who don’t work, including housewives, students, and the unemployed, though the specifics of contributions and eligibility might differ.
Social security wages in EU countries
Social security systems across European Union countries are diverse, reflecting the unique historical, economic, and cultural contexts of each member state. However, the EU does encourage coordination between member states to ensure that citizens’ social rights are maintained even if they move or work in different EU countries.
Nature of Social Security systems. Each EU country has its own distinct system. They cover various aspects such as healthcare, pensions, unemployment benefits, family benefits, and more. Depending on the country, these can be universal, insurance-based, means-tested, or a combination thereof.
Contribution rates. The percentages of wages that go toward social security vary widely. In some countries, it’s a flat percentage; in others, it can be progressive. For instance, in France, both employees and employers contribute to various social funds. In Germany, the system is insurance-based, with workers and employers typically sharing the costs equally.
Employer vs employee contributions. Almost all EU countries have a system where both the employer and employee contribute to the social security fund. The split can vary, but in many countries, it’s roughly equal or with employers paying a slightly higher percentage.
Ceilings and floors. Some countries have a minimum or maximum contribution, meaning there’s a cap on the income that’s subjected to social security contributions.
Benefits. Depending on the country and the specific benefit (health, pension, unemployment), the method of calculating and disbursing benefits will vary. Some are based on lifetime earnings, while others are flat rates, and some are means-tested.
***
In MWDN, we take care of calculating, deducting, and helping our employees to pay Social security wages based on their country of residence. If you’re hiring specialists from abroad with us, you can rest assured that all the labor legislation and taxation rules will be preserved.
« Back to Glossary Index