Where Do Your Social Security and Medicare Taxes Go?

Most W-2 employees' pay stubs detail the taxes and deductions that are taken from their gross pay. You'll almost certainly see two items among these deductions, in addition to federal and 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 collected from both the employer and the employee.

An Additional Medicare Tax can be deducted from some employees’ pay as well. After federal and state income taxes, Social Security and Medicare, or FICA taxes, make up the bulk of taxes that are routinely withheld from your paychecks.

How FICA Taxes Are Paid

You, the employee, pay half the FICA taxes, which is what you see deducted on your pay stub. Your employer must match these amounts and pay the other half to the government separately at regular intervals.

Social Security and Medicare Tax Withholding Rates and Limits

Employees are no longer required to pay the Social Security tax in a given year once their earnings hit the contribution and benefits base, often referred to as the “taxable maximum.” For example, if you earned $150,000 in 2022, you—and your employer—would pay the Social Security tax on only the first $147,000. The remaining $3,000 is free of Social Security taxes. For 2023, the taxable maximum is $160,200. 

The Medicare taxes work somewhat in reverse. All income is subject to Medicare taxation, but the Additional Medicare Tax does not apply until after your income reaches a certain threshold: $200,000 for individual taxpayers in 2022 and 2023.

Where Social Security Taxes Go

The bulk of the FICA tax revenue goes to funding the U.S. government's Social Security trusts. These trusts are solely designated to fund the programs administered by the Social Security Administration, including:

• Retirement benefits
• Survivor benefits
• Disability benefits

The Social Security tax revenue that's collected from wage earners and employers is placed into these trusts, which in turn fund the monthly benefits to these individuals:

• Retirees and their spouses who have qualified for Social Security
• Surviving spouses and minor children of workers who have died
• Workers with disabilities

Costs associated with administering the plan also come directly from these trusts, but they're minimal: Less than one cent out of every dollar collected pays for administrative costs, according to the Social Security Administration. 

Investments made from the funds placed in these trusts allow the federal government to essentially borrow against the surplus to fund other parts of the government. This practice has many worried about the longevity of these Social Security programs, but the government has repaid its loans from the Social Security trusts with interest so far.

Where Medicare Taxes Go

The remainder of FICA tax money collected from your paycheck and from your employer goes to the Medicare program, which funds health care costs for older people and younger Americans with disabilities. The Medicare taxes collected from current wage earners and their employers are used to pay for hospital and medical care costs incurred by current Medicare beneficiaries. Any excess tax revenue is accounted for in a designated Medicare trust fund.

Unlike Social Security, Medicare is also financed through premiums, income taxes paid on Social Security benefits, interest earned on Social Security trust-fund investments, and from the funds authorized by Congress, so it's not wholly dependent on the collection of FICA payroll taxes.

The Additional Medicare Tax

The Additional Hospital Insurance Tax, more commonly referred to as the Additional Medicare Tax, is provided for by the Affordable Care Act (ACA). It became effective on Nov. 29, 2013.

The purpose of this tax is to fund the provisions of the ACA as well as the Premium Tax Credit that went into effect under the ACA, and it was implemented with the express purpose of doing so. It works out to a rate of 0.9%, and employers do not have to match it, but it's not applicable to all taxpayers.

Only those with incomes that exceed $200,000 annually ($250,000 for couples who are married and filing jointly) are subject to this tax.

Frequently Asked Questions (FAQs)