DEFINITION of 'Social Security Act'

A law enacted by President Franklin D. Roosevelt in 1935 to create a system of transfer payments in which younger, working people support older, retired people. Under the act, the government began collecting the Social Security tax from workers in 1937 and began making payments in 1940.

BREAKING DOWN 'Social Security Act'

The Social Security tax combines with the Medicare tax to form what is known as FICA, or the payroll tax. As of 2010, the Social Security tax rate was 6.2% and the Medicare tax rate was 1.45%. The total payroll tax of 7.65% is deducted from the employee's paycheck; the employer must make a matching contribution of an additional 7.65%. The employee effectively pays the entire tax, as the employer's matching requirement reduces what he is able to pay his employees. Thus, Social Security represents a tax of 12.4% on the employee in addition to Medicare taxes, federal income taxes, state and local income taxes, sales taxes and numerous other less-noticed taxes.

To learn more about the Social Security Act, check out Why is Social Security running out of money?

RELATED TERMS
  1. Social Security Tax

    The tax levied on both employers and employees used to fund the ...
  2. Payroll Tax

    Tax an employer withholds and/or pays on behalf of their employees ...
  3. Medicare Wages

    An employee's earnings that are subject to a U.S. payroll tax ...
  4. Social Security

    A United States federal program of social insurance and benefits ...
  5. Federal Insurance Contributions ...

    A U.S. law requiring a deduction from paychecks and income that ...
  6. Social Security Benefits

    The monetary benefits received by retired workers who have paid ...
Related Articles
  1. Retirement

    When Do I Stop Paying Social Security Tax?

    Almost never, unless you belong to one of these special groups.
  2. Financial Advisor

    These 13 States Tax Your Social Security Benefits

    It may surprise many that Social Security benefits are taxed. The best way to not let it derail your tax situation is to plan for it. Here's how.
  3. Retirement

    Understanding Your FICA Payments

    The Federal Insurance Contributions Act is a U.S. law that requires a paycheck deduction be paid to Social Security and Medicare.
  4. Retirement

    How Social Security Works for the Self-Employed

    As both employee and employer, you have to pay more in Social Security, but there are deductions that can help lighten the tax burden.
  5. Taxes

    A Concise History Of Changes In U.S. Tax Law

    We look at how U.S. taxes have changed since their inception.
  6. Taxes

    Small Business Tax Obligations: Payroll Taxes

    Don't leave it up to your accountant - owners are ultimately responsible for fulfilling tax obligations.
  7. Taxes

    5 Most Taxing Taxes for Americans

    There’s not much that unites Americans like their hatred of taxes. Here's a list of taxes we dislike the most.
  8. Taxes

    The History Of Taxes In The U.S.

    The number of taxes that we now consider a given did not always exist. Find out how they arose.
  9. Taxes

    Do Tax Cuts Stimulate The Economy?

    Learn the logic behind the belief that reducing government income benefits everyone.
  10. Financial Advisor

    3 Federal Income Tax Facts You Didn't Know

    Learn about three federal income tax facts that most Americans may not know from one of the most trusted financial resources on the Web.
RELATED FAQS
  1. What is the Social Security tax rate?

    Learn what the Social Security tax rate is, how it has evolved over the years, what is future may hold and a common complaint ... Read Answer >>
  2. What are the Social Security tax caps?

    Learn how the Social Security tax cap works, what percentage of income is deducted for Social Security taxes and the history ... Read Answer >>
  3. How is Social Security tax calculated?

    Find out how Social Security tax withholding is calculated, including the impact of the Medicare tax and the maximum taxable ... Read Answer >>
Hot Definitions
  1. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  2. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  3. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  4. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  5. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  6. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
Trading Center