What Is the Purpose of Social Security Tax?


Quick Answer

The purpose of the Social Security tax is to fund the current Social Security program, explains Investopedia. The money collected from the tax pays for current retiree’s Social Security benefits, which include a monthly income disbursement and Medicare health insurance.

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Full Answer

The Internal Revenue Service collects the tax through payroll deductions on employees or taxes on self-employed individuals, states Investopedia. Individuals who receive Social Security benefits do pay taxes on their benefits if they receive substantial income from another source. In the past, retirees were exempt from paying taxes on their Social Security benefits. The IRS does not put the funds collected from the tax into a trust for individuals to help fund their retirement.

In most cases, the federal government requires that employed individuals earning a paycheck pay Social Security and Medicare taxes, according to the IRS. Employers must deduct a percentage of an employee’s earnings to help fund the entire Social Security system, including Medicare. Employees must pay the tax whether or not they expect to qualify for Medicare or Social Security benefits. Foreign persons, known as nonresident aliens, who worked and retired in the United States must pay a flat income tax of 30 percent on 85 percent of their retirement benefits, including any survivor’s benefits or disability benefits.

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