What are social security wages on w2?

What are social security wages on form W-2?

Social security wages are the earnings shown on an employee’s W-2 form that are liable to social security tax. This amount is significant because it determines the social security contributions made by both the employee and the employer, and it influences the benefits the employee will be entitled to at retirement. Certain types of income are excluded from this calculation, for example contributions to a 401(k) plan.

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

The following explains how social security wages are reported and calculated:

Location on form W-2. Box 3 of the W-2 indicates the social security wages — the total earnings paid to the employee during the year that are subject to social security tax.

Tax rate and limit. In 2023 the social security tax rate for employees is 6.2%; employers contribute a matching 6.2%, giving a combined rate of 12.4%. A wage cap applies — for 2023 the maximum taxable earnings are $160,200, so any income above that threshold is not subject to social security tax.

What is included. Social security wages generally cover most forms of earned income, such as salaries, wages and bonuses. Note that some compensation items, including contributions to a 401(k) plan, are counted in social security wages even though they may be excluded from federal income tax.

Differences from gross wages. The figure in box 3 (social security wages) can differ from the value shown in box 1 (wages, tips and other compensation) on the W-2. Such differences arise because certain payroll deductions — for example 401(k) contributions or health insurance premiums — are exempt from federal income tax and therefore reduce box 1 but not necessarily box 3.

How to effectively manage social security wages

Organisations must accurately record and report employee earnings that are subject to social security tax to maintain compliance with federal law and to safeguard future employee benefits.

HR and payroll teams should:

•  Be aware of the social security wage cap — the maximum yearly amount of earnings on which social security tax is levied. This cap is adjusted annually to reflect inflation and other economic conditions.
• Ensure the payroll function is kept informed of legislative changes affecting social security wages. Regular training and periodic updates help maintain compliance and payroll accuracy.
• Deploy robust payroll systems that automatically update in line with current legislation to calculate and report social security wages accurately. This reduces the risk of errors and supports compliance.

Essential considerations for companies 

• Maintain accuracy within the payroll system to avoid penalties and to protect employees' entitlement to benefits.
• Keep abreast of annual adjustments to the social security wage cap.
• Be transparent with employees about how their social security wages are calculated and reported.