What are Covered Earnings?

by Investing School on September 17, 2012

Covered earnings are the total amount of pay that is included when calculating retirement benefits. Under most circumstances the majority of these earnings come from the employee’s base pay; however, compensation offered in other forms may also be included as part of covered earnings. Covered earnings are subject to Social Security taxes in the United States with a few exceptions.

There is value in knowing exactly which covered earnings are associated which a particular tax year since some nations offer government-sponsored pension plans. Covered earnings are used to determine how much of a contribution is required from the employee. Such contributions are tracked and have a direct relationship to the amount of monthly payouts provided after retirement. There are some countries where contributions are matched and/or mandatory.

While most nations consider salaries and wages paid in most fields to be part of covered earnings, caveats exist. For example, income earned from local governments may not be considered taxable for a national pension plan. Income generated in some industries may also be exempt; earnings acquired while working for the railroad is a common exception.

Understanding which of your earnings are considered part of covered earnings is essential if you are to contribute to mandatory retirement funds properly. While this isn’t likely to be a problem for those who work in typical public sector jobs in the United States, those that work with government agencies, in foreign nations and in some forms of industry need to be more attentive come tax time. It may be wise to consult with a financial advisor.

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