FICA: Where Do Your Payroll Taxes Go?
FICA Payroll Taxes is something that anyone earning income in American is subject to paying. The Federal Insurance Contributions Act was passed in 1935 to create a tax to pay for the Social Security program. Today, it’s best known as the FICA or payroll tax. Most have it deducted from their take-home pay by their employer, but self-employed workers must pay for it via their estimated quarterly income tax payments.
The FICA tax is different from regular income taxes. It is siphoned out separately and earmarked to pay for Social Security retirement and disability benefits. The money collected this year will be used to pay for current beneficiary benefits. Any year the federal government collects more in FICA taxes than it pays out to beneficiaries, the excess money is deposited into two Social Security Trust Funds: one for Disability Insurance and the other for Old Age and Survivors Insurance. These assets are used in years when there are not enough FICA taxes collected to pay for current benefits.
When that happens, it’s called a deficit. One of the concerns of Social Security program administrators is that the U.S. has been running the program at a deficit since 2018.1 This means each year more money is pulled from the trust funds. Given the ongoing deficit and depletion of trust funds, reserves were expected to run out by 2035.
However, President Trump announced a moratorium on FICA taxes between September and December last year for workers making less than $100,000 a year, which means Social Security benefits created a substantially higher deficit in 2020. Between the payroll tax holiday and the increased number of Americans who were out of work, significantly more money will have to be withdrawn from the trust funds to pay benefits. Analysts now predict that between the economic decline and lost FICA revenue from last year alone, reserve funds could run out as soon as 2032.2
Once Social Security trust funds are depleted, benefit payout can total no more than what is collected each year in FICA taxes. If Social Security continues to run at a deficit and Congress does not enact any changes, the program will have to reduce benefits, increase the full retirement age — or both. That hasn’t happened since the 1980s.3
Currently, the FICA tax for Social Security is 12.4%, half of which is paid for by employers. Self-employed workers must pay the full 12.4% but can claim half the FICA tax as a deduction. Note that there is a separate tax (2.9% total paid by employers and employees) deducted from income to pay for the Medicare program, which is used to pay for current Medicare expenses.4
Our firm is not affiliated with or endorsed by the U.S. government or any governmental agency and does not provide tax advice.
1 Stephen J. Entin. Tax Foundation. June 12, 2018. “Social Security in Deficit: Why and What to Do About It.” https://taxfoundation.org/social-security-deficit/. Accessed Oct. 10, 2019.
2 Tami Luhby. CNN. Aug. 8, 2020. “Coronavirus has already dealt a blow to Social Security’s finances. Trump’s payroll tax holiday could make it worse.” https://www.cnn.com/2020/08/07/politics/social-security-medicare-trump-payroll-taxes/index.html. Accessed Oct. 10, 2019.
Text Pull for Dollars & Sense article
If Social Security continues to run at a deficit and Congress does not enact any changes, the program will have to reduce benefits, increase the full retirement age – or both. That hasn’t happened since the 1980s.