What does Social Security tips mean on a W-2 form? In the grand scheme of things, do tips really matter with regard to taxable income? Yes, they do. Both cash and non-cash tips are usually part of your taxable compensation, and you need to understand how the IRS treats tips and what Social Security tax is withheld to accommodate them.
Read More: W-2 Forms: What It Is, Who Gets One & How It Works
How Are Taxes Withheld From Social Security for Tips?
If you’re in an industry where you are customarily tipped for your services, you are already probably familiar with how it works. You faithfully report your tips to your employer, and trust that the appropriate taxes are being withheld. While this is true in most cases, it is always a good idea to understand exactly what the tax implications of being a tipped employee are.
Social Security taxes are part of payroll deductions known as Federal Insurance Contributions Act, or FICA taxes. Because Social Security taxes are mandatory, the IRS does not allow you to deduct them on your taxes.
Read More: How to Calculate Social Security Tax
What Are the Social Security Tips Taxes?
Since the IRS considers any tips you receive to be part of your wages or income, you are required to report cash tips totaling $20 or more per month to your employer. In addition, you may also have to pay taxes on this income.
Your employer will deduct federal income, state and local tax as well as Medicare and Social Security taxes from your income. Because you include your tips along with your standard pay, the process of filing taxes on your tips is no different than it is for someone filing taxes on any other source of income.
Each year, the IRS releases income minimums that must be reached before you are required to file taxes. When your income reaches this threshold, depending upon your age and filing status, you must file a tax return for the year. There are, of course, Social Security loopholes for seniors, but these are an exception rather than a standardized rule for most working adults.
FICA Tax Rates
Social Security and Medicare contributions are collectively known as FICA or Federal Insurance Contributions Act taxes, and are mandatory payroll deductions that both employees and employers must pay.
So, what percentage is withheld for social security? Usually, social Security accounts for 6.2 percent of this tax, and the Medicare contribution is 1.45 percent. Because employers and employees are responsible for making these contributions, the total amount of FICA taxes collected are 15.3 percent.
Social Security Tax Thresholds
There is a threshold on the amount of your income that is subject to Social Security tax. For tax year 2021, this amount is $142,800. It represents a $5,100 increase from the 2020 income threshold. And for the tax year 2022, the threshold will increase to $147,000.
However, you need to remember that there is no limitation on the amount of your income that is subject to the other component of FICA tax – Medicare. In fact, you may end up paying an additional 0.9 percent as Medicare tax if your income exceeds the set threshold.
There is also a lesser known aspect of FICA taxes that are imposed on wages in excess of $125,000 for married filing separately status, $250,000 for taxpayers who are married filing jointly and $200,000 for all other taxpayers. This 0.9 percent Medicare surtax, also known as the Additional Medicare Tax, went into effect on January 1, 2013, as a provision of the Affordable Care Act.
Understanding social security benefits strategy options such as these are absolutely critical.
Tip Income Reporting
When you file taxes on your wages, including your allocated tips, you have to complete the IRS Form 1040, "U.S. Individual Income Tax Return." To your 1040, you also need to attach the IRS Form 4137, "Social Security and Medicare Tax on Unreported Tip Income."
Use Form 4137 to report tips allocated to you by your employer, based on the amount in Box 8 of your Form W-2, "Wage and Tax Statement," that employers are required to send out to employees by January 31 of the new year.
Read More: Form 1040: What You Need to Know
Because Social Security taxes, along with Medicare contributions, are mandatory payroll taxes, the IRS does not allow you to deduct these on your tax return. You can include federal income taxes that you have paid in the year, in hopes of a refund, but Social Security and Medicare taxes cannot be deducted.
- IRS.Gov: Topic No. 752 Filing Forms W-2 and W-3
- IRS.Gov: Tip Recordkeeping & Reporting
- SSA.Gov: What is FICA?
- IRS.Gov: Topic No. 761 Tips – Withholding and Reporting
- IRS.Gov: Topic No. 751 Social Security and Medicare Withholding Rates
- SHRM.Org: 2021 Wage Cap Rises for Social Security Payroll Taxes
- IRS.Gov: Topic No. 560 Additional Medicare Tax
Tara Thomas is a Los Angeles-based writer and avid world traveler. Her articles appear in various online publications, including Sapling, PocketSense, Zacks, Livestrong, Modern Mom and SF Gate. Thomas has a Bachelor of Science in marine biology from California State University, Long Beach and spent 10 years as a mortgage consultant.