Where Do Your Social Security and Medicare Taxes Go?
Most W-2 employee pay stubs itemize taxes and deductions that are taken from your gross pay. You will almost certainly see two items between these deductions, in addition to federal, state, or local income taxes: Social Security and Medicare taxes.
These taxes are part of the Federal Insurance Contributions Act (FICA) tax, a group of payroll taxes that are levied on the employer and the employee.
Additional Medicare taxes may also be deducted from the pay of some employees. After federal and state income taxes, Social Security and Medicare taxes, or FICA, make up the majority of taxes normally withheld from your paychecks.
How FICA taxes are paid
You, the employee, pay half of the FICA tax, which is what you see deducted from your paycheck. Your employer must match these amounts and pay the other half to the government separately at regular intervals.
Social Security and Medicare withholding rates and limits
Employees are no longer required to pay Social Security taxes in a given year when their income reaches the contribution and benefit base, often referred to as the "taxable minimum." You, and your employer, would pay Social Security taxes only on the first $ 142,800 in 2021 if you made $ 143,000, for example. The remaining $ 200 is exempt from Social Security tax.
Social Security tax will be applied again on January 1 of the new year until your earnings return to the taxable minimum.
Medicare taxes work a bit in reverse. All income is subject to Medicare tax, but the additional Medicare tax does not apply until your income reaches a certain threshold: $ 200,000 in 2020 and 2021.
Where do social security taxes go?
Most of FICA's tax revenue goes to fund the social security funds of the United States government. These funds are intended exclusively to fund programs administered by the Social Security Administration, including:
Social Security tax revenue that is collected from employees and employers is put into these funds, which in turn fund monthly benefits for these people:
Retirees and their spouses who qualify for Social Security (retirement benefits).
Surviving spouses and minor children of deceased workers (survivors' benefits).
Disabled workers (disability benefits).
The costs associated with administering the plan also come directly from these funds, but they are minimal: Less than a penny of every dollar raised pays for administrative costs, according to the Social Security Administration.
Taxes collected may exceed the cost of current benefits. The money is placed in trust funds and invested to pay for future program benefits when this occurs.
Investments made with the funds placed in these trusts allow the federal government to basically borrow against the surplus to finance other parts of the government. This practice has many concerned about the longevity of these Social Security programs, but so far the government has paid interest on loans from Social Security funds.
Where do Medicare taxes go?
The rest of the FICA tax money collected from your paycheck and your employer goes to the Medicare program, which funds health care costs for America's seniors and youth with disabilities.
Medicare taxes collected from current employees and their employers are used to pay for hospital and health care expenses incurred by current Medicare beneficiaries. Any excess tax revenue is posted to a designated Medicare trust fund.
Unlike Social Security, Medicare is also funded through premiums and general government revenue, so it is not entirely dependent on the collection of payroll taxes from FICA.
The additional Medicare tax
The Supplemental Hospital Insurance Tax, more commonly known as the Supplemental Medicare Tax, is provided by the Affordable Care Act (ACA). It became effective on November 29, 2013.5
The purpose of this tax is to fund the provisions of the ACA, as well as the Premium Tax Credit that came into effect under the ACA, and was implemented for the express purpose of doing so. It works at a 0.9% rate and employers do not need to match it, but it does not apply to all taxpayers.
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