- Social Security tax is levied under the authority of the Federal Insurance Contributions Act (FICA) and the Medicare program. The laws cover almost all workers in the private sector. Some state and federal employees are not part of the Social Security system and are covered under separate retirement/benefit plans. A common feature of both the FICA and Medicare portions of the Social Security tax is the amount deducted from an employee's pay is matched by the employer.
- Social Security began in 1935 with the passage of the Social Security Act. It authorized a tax on workers' incomes of 1 percent to fund retirement benefits. The law was intended to benefit struggling older Americans and to encourage them to not work during the depths of the Depression. The original law also authorized pensions for the blind (Title X, since extended to all disabilities). It also authorized joint funding with the states for unemployment compensation (Title III), aid to families with dependent children (Title IV) and other programs. Some of these are still in effect, but except for disability programs are no longer a part of Social Security. In 1951, employer contributions were added under FICA. Medicare was added in 1965.
- The FICA tax is 6.2 percent of an employee's pay, up to an income cap that is adjusted annually. In 2008 the cap was $102,000 annually. Employers pay an equal amount (another 6.2 percent). The Medicare tax is 1.45 percent on all income with no cap. Again, employers match the employee tax dollar for dollar. The employee contribution totals 7.65 percent, and when combined with the employer contribution, the total is 15.3 percent. Persons who are self-employed are required to pay the entire 15.3 percent.
- Employers are responsible for collecting the Social Security tax by deducting it from employees' pay. To compute the deductions and get fling instructions, an employer needs Publication 15, Circular E (updated for the current year). which can be downloaded from the IRS website (irs.gov). In addition, employers must file Form 941 quarterly to report all deductions. Persons who are self-employed have to file Form SE when they file their income tax annually.
- All FICA and Medicare taxes go to fund specific benefits, not into the federal government's general funds. The FICA tax funds Social Security retirement benefits. It is also used to provide survivor's benefits to eligible surviving spouses and children. Persons who have worked and paid into the system but become unable to work due to a disability can receive Social Security Disability Income (SSDI). Supplemental Security Income (SSI) is available for children and some adults who are disabled but lack a work history and other resources. Medicare is available primarily to those who have worked and paid into the system. It is used to supplement the premiums paid for general Medicare insurance and Medicare Part D (prescription drugs).
