There's more than one kind of taxable wages. Pay that isn't subject to income tax -- money you put in a 401(k), for instance -- is still subject to the Social Security and Medicare taxes payable under the Federal Insurance Contributions Act. The rules with regard to paying FICA tax are distinct from the rules governing income tax.
The U.S. Code defines FICA-taxable wages as employee pay, including the cash value of benefits and non-cash compensation. The code excludes some types of workers: for example, children younger than 18 working for their parents, people paying into the federal retirement system, prison inmates working for the government and ministers of churches that object to Social Security on religious grounds. Foreigners spending time in the United States as temporary agricultural workers are also exempt.
Unlike income tax, you pay FICA based on your gross income. There's no standard deduction, itemized deductions or exemptions for dependents you can take to reduce how much tax you pay in. Money you contribute to a 401(k) plan, an IRA or a health-savings account is free from income tax, for instance, but not from FICA taxes. Your pay stub and your W-2 form reflect this: They show your taxable income for FICA and for income tax, and the two are often different.
Even if you qualify as an employee subject to FICA, some of your pay or benefits may be exempt from Social Security taxes. Although you pay Social Security tax on cash tips, non-cash tips -- a movie ticket or a free meal, for instance -- aren't FICA-taxable. If you're disabled by an accident or illness, disability payments from your employer for your medical or hospital expenses are exempt, as are workers' compensation insurance payments. Payments from certain types of annuity or retirement plans are also FICA-free.
Unlike income tax, Social Security taxes come with a cap: Any money you make above a certain level of income is tax-free. In 1937, the limit was $3,000; in 2012, it's $110,100. If you make $120,000 in 2012, you pay tax up to the $110,100 limit but no tax on the $9,900 above that. The tax has changed over the years, partly to improve Social Security funding and partly to reflect inflation. There's no cap on the Medicare share of FICA taxes.
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