Money to pay for Social Security is collected through what is commonly called “FICA taxes.” Employers and employees split the cost of these taxes, which are required under the Federal Insurance Contributions Act (FICA). The act was put in place to ensure that retired people had an income for themselves and their families.
When Did FICA Taxes Start?
Many people experienced extreme financial hardship during the Great Depression (1929-1939). The government decided to pass legislation to help taxpayers save for their retirement.
Read More: What are the Standard Payroll Deductions?
Understanding the Social Security Tax
The Federal Insurance Contributions Act became law in 1935 to provide funding for Social Security. The difficult decade of the Depression Years brought home the fact that employment was not something people could take for granted during their life.
Outside forces, such as the stock market crash, could have unforeseen consequences on workers. It did not matter how well the employees had done their work; if the company had to lay off staff due to economic conditions or close down completely, the workers were left to fend for themselves. There was no safety net in place for people of retirement age to support themselves or their families.
Handling of Social Security Contributions
Contributions are deducted from an employee’s check every time they are paid. Certain groups are exempt from paying Social Security tax, such as members of the Amish faith and students who are completing their medical residency. The funds are initially directed to the Internal Revenue Service. After that point, the money is paid into a specific Social Security fund. It is used for programs that provide benefits for:
- Children and spouses
- Disabled people
The amount of Social Security tax deducted from an employee’s paycheck depends on their gross pay. These payments also determine how much they will receive when they retire. The spouse and children of a dead person may be able to collect the deceased's Social Security benefits, which gives the survivors a certain level of income after the taxpayer dies.
Read More: Does Everyone Get Social Security?
Exploring the Medicare Tax
Medicare taxes started in 1965 under President Lyndon Johnson’s administration. The funding for most of Medicare’s Hospital Insurance (HI) program comes from payroll taxes. Employers and employees each pay half the required amount.
Under Title XVIII of the Social Security Act, Medicare provides the following coverage to the majority of Americans aged 65 or older:
- Home health coverage
- Hospital care
- Post-hospital extended care
Medicare healthcare recipients include Social Security retirement benefits or Railroad Retirement Board benefit recipients. Individual states can choose to receive federal funding to provide healthcare services to these population groups:
- Low-income children and their caretaker relatives
- People living with disabilities
- People with visual impairments
When the Medicare legislation became law, seniors were the population group that was most likely to be living in poverty. Only about half of them had health insurance coverage. In 1972, Medicare coverage changed. It would now cover disabled people under age 65 and end-stage renal disease (ESRD) patients.
FICA Taxes for Financial Security
FICA taxes are collected to help provide some income when workers reach retirement age. The money goes into a pool and is paid out to give eligible recipients a basic level of income and medical coverage. If you have questions or concerns about the number of your payroll deductions, ask your employer for clarification.
Read More: Social Security Tax and Pensions
- TaxLaws.com: History of the Federal Insurance Contributions Act
- CMS.gov: Medicare and Medicaid Milestones, 1937-2015
- IRS: Topic No. 751 Social Security and Medicare Withholding Rates
- Social Security Administration. "What Are FICA and SECA Taxes?" Accessed April 1, 2020.
- Social Security Administration. "2021 SOCIAL SECURITY CHANGES." Accessed Oct. 15, 2020.
- Internal Revenue Service. "Topic No. 751 Social Security and Medicare Withholding Rates." Accessed Nov. 5, 2020.
- Social Security Administration. "Supplemental Security Income Overview." Accessed April 1, 2020.
Jodee Redmond is a freelance writer, blogger and editor who has been working full-time for over 15 years. She is a graduate of Centennial College and has worked as a tax consultant and a legal assistant. Her previous experience and boundless curiosity is a distinct advantage when writing about such varied topics as income tax, insurance, commercial property, business, construction, addiction, freelance writing and more.