What is the purpose of Social Security and Medicare deductions from my paycheck?

Question

Sorry, this might be a basic question, but I'm having trouble understanding this, so would like to ask here.

I've recently started a full-time position, and I notice that two things are being deducted from my salary in addition to income taxes:

1. Social Security
2. Medicare

I had adjusted my income / expenses and factored in taxes, but these two have thrown my calculations off.

I know that these two are mandatory, but what is their function? When do I get to "collect" on Social Security and Medicare?

I'm very clear about 401K now, but I've deferred putting money into my 401K till I get a hang of the other deductions on my salary.

Answer 1

These two items (social security and taxes) should have also been withheld from any other positions you held previously.

Both these items cover you in the future. Social security when you reach retirement age, or earlier if you are disabled. Medicare to serve a your health insurance when you are a senior citizen.

Everybody who has wage income pays the medicare tax, there is no maximum limit. For Social security you pay your share until your wage income hits a specific limit. Both Social security and medicare are split between the employee and the employer. If you are a contractor you get to pay both parts.

The rate and limits are set by congressional law, and they can be adjusted by congress. In terms of financial crisis they have actually lowered the rates to help workers.

The social security website gives you the limits for each year:

For 2013, the maximum amount of taxable earnings was $113,700. In 2014, the maximum amount of taxable earnings is $117,000.

If you want to be able to track your earnings and benefits go the the social security website to see where you stand. Keep in mind that the it will only have your earnings through the previous year.

Answer 2

From Socialsecurity.gov on Medicare:

Medicare is our country’s health insurance program for people age 65 or older. Certain people younger than age 65 can qualify for Medicare, too, including those who have disabilities and those who have permanent kidney failure.

From Socialsecurity.gov on Social Security:

You can apply online for retirement benefits or benefits as a spouse if you:

• are at least 61 years and 9 months old;
• are not currently receiving benefits on your own Social Security record;
• have not already applied for retirement benefits; and
• want your benefits to start no more than 4 months in the future. (We cannot process your application if you apply for benefits more than 4 months in advance.)

Course the rules may change over time so these are just the current information from those sites.

From the IRS site on one other point that may be useful here:

Social Security and Medicare Taxes

Employers generally must withhold part of social security and Medicare taxes from employees' wages and you pay a matching amount yourself. To figure out how much tax to withhold, use the employee’s Form W-4 and the methods described in Publication 15, Employer's Tax Guide and Publication 15-A, Employer's Supplemental Tax Guide.