Who Pays Social Security and Medicare Taxes?
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Who Pays Social Security and Medicare Taxes?
Who pays Social Security taxes? If you work, you do.
Things To Know
- Social Security and Medicare taxes are withheld from your paycheck, matched by your employer, and sent to the IRS.
- There is a cap on how much of your income is taxable for Social Security.
How the taxes work
Social Security and Medicare taxes are withheld from your paycheck, matched by your employer, and sent to the IRS. You and your employer each pay 7.65 percent of your gross earnings in taxes, up to maximum taxable earnings of $168,600 in 2024. This limit usually, but not always, increases each year. Your earnings are reported to Social Security under your Social Security number. If you are self-employed, you pay all of your Social Security taxes on your self-employment income (15.3 percent).
If you earn more than the yearly Social Security limit, you still have to pay Medicare taxes on your earnings. This rate is 1.45 percent, or 2.9 percent for self-employed workers, plus an additional 0.9% on certain higher earnings.
Trust funds hold Social Security taxes
The Social Security taxes you pay go into trust funds in the US Treasury. These trust funds are called the Old Age and Survivors Insurance (OASI) and the Disability Insurance (DI) trust funds. The OASI pays for retirement and survivors’ benefits. The DI pays disability benefits.
There are also two Medicare trust funds: Hospital Insurance (HI) and Supplementary Medical Insurance (SMI). Most of your payroll taxes (6.2 of the typical 7.65 percent) go to OASI.
Money from payroll taxes is collected and deposited into the Social Security trust funds. Any money not used to pay benefits is invested in special non-marketable US government bonds. The trust funds are managed by a board of trustees and are funded by the partial reserve method. The goal of partial reserve is for the funds to take in more money than they pay out in order to prepare for increasing numbers of retirees.
How the bonds work
A bond is essentially a loan with interest—an IOU. The bond issuer (in this case the government) agrees to pay interest on the loan as well as pay back the full amount of the bond at a preset future date. The government uses the proceeds of the bonds Social Security invests in to pay for a wide array of government programs. The Social Security trust funds earn interest on these bonds. In other words, the government borrows the money paid in Social Security taxes to use for general obligations, and issues IOUs to itself in return.