The major source of income to the Social Security Trust Funds is employment
taxes, specifically taxes on wages as defined in the Federal Insurance Contributions
Act (FICA) and taxes on self employment as defined in the Self Employment Contributions
Act (SECA). The following describes how these Social Security taxes are deposited
into the trust funds.
Employers are not required to distinguish Federal income taxes from Social
Security taxes when they deposit taxes with Federal Reserve banks. Thus,
Social Security taxes are first deposited in the trust funds on an
estimated basis and are later adjusted to reflect actual
employment data. By law,
Social Security taxes must be based on employment records maintained by the Social
Security Administration (SSA), not on the actual amount of taxes collected by
the Internal Revenue Service (IRS).
Estimates and deposits
The Social Security Administration (SSA) estimates future tax liability
by calendar year and trust fund. SSA also estimates the
portion of tax liabilities that will be collected quarterly.
SSA sends these estimates to the Department of the Treasury, where
the estimated quarterly tax collections are split into monthly
tax collections. For each month, Treasury also splits the estimated tax
collections into estimated tax liability amounts.
Treasury also estimates Federal income taxes withheld by month and
computes monthly ratios of FICA taxes, one for each trust fund,
to the sum of FICA taxes and income taxes. Then Treasury multiplies
each day's actual tax receipts by each ratio, yielding the estimated
FICA part, and deposits that part into the appropriate trust fund.
If the sum of such daily deposits reaches the month's estimated total
before the end of the month, no more taxes are deposited in that month.
On the other hand, if the sum fails to reach the month's estimated total,
extra money is deposited on the last day of the month to make up
the shortfall. Either way, the estimated amount for a month is
the total amount deposited. The same method is applied to SECA taxes.
For each month, Treasury estimates the portion of
FICA taxes deposited that represent
- liability for that month's calendar quarter, and
- the remaining portion (if any) representing liability for
the previous quarter.
Quarterly tax liabilities are the appropriate sums of monthly liabilities
and form the basis for subsequent FICA tax adjustments.
Similarly, Treasury estimates the portion of SECA taxes deposited that represent
- liability for that month's calendar year, and
- the remaining portion (if any) representing liability
for the previous year.
Annual tax liabilities are the appropriate sums of monthly liabilities
and form the basis for subsequent SECA tax adjustments.
Adjustment of estimated tax liability
SSA collects wage data from three sources.
- W-2s processed by SSA provide individuals' wage information by calendar year.
- Employee tips and wages, not reported by employers, but reported on employee tax
returns (Form 4137); IRS processes the data and sends them to SSA.
- Forms 941 processed by IRS provide aggregate wage data by calendar quarter.
IRS sends the processed data to SSA four times per year.
SSA certifies aggregate earnings (wages and self-employment income) in letters
sent quarterly to Treasury. Each such certification letter contains
data for prior years, back to 1937, to the extent that the current earnings
data differ from amounts previously certified. As there are generally
fewer corrections (positive or negative) to earnings for years that
are further in the past, certified earnings amounts become progressively
smaller for years that are further in the past, and may include negative amounts.
SSA combines quarterly 941 data to provide annual totals comparable to the
other wage data reported annually. In general, SSA then certifies the data
from the source that provides the higher wage amount for a calendar year.
Each certification letter shows wage data by calendar
year, except for the most recent year shown. For this recent year, data are shown
for the most recent reported quarter and data for other quarter(s)
of the year (if any) are combined. Each letter also shows self-employment income
by calendar year only.
To adjust FICA taxes for a particular quarter, taxes from the latest certification
letter are compared to the estimated tax liability amount established by Treasury.
This FICA tax liability for the quarter is subtracted from taxes on all wage data reported
in a certification letter, including amounts for all previous quarters or years,
and the difference is transferred either to or from a trust fund. The initial adjustment for
a particular quarter occurs about one year after the close of that quarter.
SECA taxes are adjusted similarly, except that the initial adjustment for a particular year
is normally made in the last calendar quarter of the second following year.
The calculation of tax adjustments are done independently by Treasury and SSA.
When agreement is reached, Treasury takes the steps necessary to transfer the funds.