What are social security wages on w2?

What are social security wages on form W-2?

Social security wages are the earnings recorded on an employee's Form W-2 that are liable for social security tax. This amount is important because it determines the social security tax contributions from both the employee and the employer and affects the benefits the employee may receive in retirement. The calculation excludes certain income types, for example contributions to a 401(k) plan.

How are social security wages on the W-2 form calculated?

Below is a breakdown of how social security wages are reported and worked out:

Location on Form W-2. Social security wages appear in box 3 of the Form W-2. That box records the total pay for the year that is liable for social security tax.

Tax rate and limit. For 2023, employees pay Social Security tax at 6.2%, with employers contributing the same, making a combined 12.4%. There is, however, an annual earnings ceiling subject to the tax; for 2023 that ceiling is $160,200, so earnings above this figure are excluded from Social Security taxes.

What’s included? Social security wages generally cover the bulk of earned pay — salaries, wages and bonuses. Some forms of compensation, for example contributions to a 401(k) plan, are counted in social security wages despite potentially being exempt from federal income tax.

Differences from gross wages. The figure shown in box 3 (social security wages) may not match the total in box 1 (wages, tips and other compensation) on the W-2. That is because certain payroll deductions — for example 401(k) contributions or health insurance premiums — can reduce the amount subject to federal income tax but not necessarily the amount used for social security calculations.

How to effectively manage social security wages

Employers must record and report employee earnings that are liable for social security tax with precision to remain compliant with federal law and to safeguard future benefits for staff.

HR and payroll teams should:

•  Be aware of the social security wage cap — the maximum annual earnings taxable for social security. This cap is updated each year in line with inflation and other economic indicators.
• Keep the payroll function informed about legislative changes affecting social security wages. Regular briefings and training will help maintain accuracy and compliance in payroll processing.
• Put in place reliable payroll systems that update automatically to reflect current law so social security wages are calculated and reported correctly. This minimises errors and aids compliance.

Key considerations for companies 

• Check payroll accuracy to avoid penalties and to guarantee that staff receive the correct benefits.
• Keep up to date with annual changes to the social security wage cap.
• Be transparent with employees about how their social security wages are worked out and reported.