Where Do My Tax Payments Go?

By Angela Tague, Contributor, on March 9, 2018

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After making my first self-employment tax payment, I felt a wave of relief, quickly followed by an ego-boosting air of professionalism. My business was official. I was paying my taxes. I figured it out! After the excitement wore off (and the check cleared), I started wondering where my hard-earned money went and how these tax payments would contribute to society. The short answer: Your tax payments go to federal Medicare and Social Security funds, according to the Internal Revenue Service (IRS).

When you’re a traditional employee, your employer is responsible for withholding part of your Social Security and Medicare taxes from your wages, and you then pay a matching amount yourself. In 2018, the Social Security tax rate for employees is 6.2 percent and the Medicare tax rate is 1.45 percent.

But when you’re an indy, you’re on your own. “Self-employment tax consists of both the employee and employer portion of Social Security (6.2 + 6.2 = 12.4 percent) and the employee and employer portion of Medicare (1.45 + 1.45 = 2.9 percent), which makes the total self-employment tax rate 15.3 percent.”

Understanding Funding for Medicare

As a wage earner (whether you’re a traditional employee or self-employed), you contribute to the Medicare fund each time you earn a paycheck. This pay-it-forward program serves to assist the elderly and disabled with their healthcare costs.

Down the line, you’ll have access to this fund, as well. Approximately three months before your 65th birthday, or when you’re in your 25th month of receiving disability benefits, the federal government will send you a little gift in the mail: a Medicare card. Your card will specify whether you have Part A and/or Part B coverage, which entitles you to hospital or medical insurance, respectively.

Contributing to Social Security Benefits

The other portion of your self-employment tax payments funds the Social Security program. In 2017, the Social Security Administration reported that about 167 million workers pay Social Security taxes and approximately 59 million people receive benefits from this fund.

So, who does Social Security help? There are four core populations:

  • Retirees
  • Workers who become disabled
  • Survivors of deceased workers
  • Dependents of beneficiaries

Overall, the largest group of Social Security recipients are retirees and their families. The program “replaces about 40 percent of an average wage earner’s income after retiring.” For many people, these funds won’t be enough to live on, so additional financial assistance and stability may come in the form of pensions, savings, investments, Medicare benefits, working a part-time job or buying supplemental insurance to defray medical expenses.

Next time you set aside a portion of your earnings for tax payments, feel thankful that you’re helping fund worthwhile programs that support your fellow Americans. Letting go of those hard-earned dollars is difficult, but contributing to the good of society isn’t.

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