Social Security is funded mainly by payroll taxes on wages and self-employment income, with two smaller streams filling out the rest: interest earned on the program’s trust fund investments, and federal income tax that higher-income retirees pay on their benefits. Payroll taxes alone supply roughly 90% of the money coming in. In 2024, those three sources together brought in over a trillion dollars, enough to send monthly checks to about 70 million people.
The Payroll Tax on Wages
The core of the system is the Federal Insurance Contributions Act payroll tax. If you work a traditional job, 6.2% of your wages is withheld for Social Security under 26 U.S.C. § 3101.1Office of the Law Revision Counsel. 26 USC 3101 – Rate of Tax Your employer pays a matching 6.2% that never appears on your pay stub but is a real cost of employing you, bringing the combined contribution to 12.4% of wages.2Office of the Law Revision Counsel. 26 USC 3111 – Rate of Tax
That 12.4% only applies up to the annual Social Security wage base. For 2026, the cap is $184,500, meaning an employee earning at or above that amount contributes $11,439 for the year and the employer matches it.3Social Security Administration. Contribution and Benefit Base Every dollar you earn above the cap is free from the 6.2% Social Security withholding. Medicare taxes are separate and apply to all earnings with no cap.
The Self-Employment Tax
If you work for yourself, you pay both halves. Under 26 U.S.C. § 1401, the Social Security portion of the self-employment tax is 12.4% of your net earnings.4Office of the Law Revision Counsel. 26 USC 1401 – Rate of Tax The tax kicks in once your net self-employment earnings reach $400 for the year.5Office of the Law Revision Counsel. 26 USC 1402 – Definitions The same $184,500 wage base applies, so earnings above it aren’t subject to the Social Security portion.
To soften the effect of paying both shares, the tax code lets you deduct half of your self-employment tax when calculating adjusted gross income, mirroring how traditional employers deduct their share as a business expense.6Office of the Law Revision Counsel. 26 USC 164 – Taxes You report the tax on Schedule SE with your Form 1040, and those payments build the earnings record that determines your future benefit amount.
Interest From the Trust Fund Investments
Money the program collects but doesn’t immediately need doesn’t sit in cash. By law, any surplus is invested in special-issue U.S. Treasury securities, bonds that aren’t available to the public and exist solely for the trust funds.7Social Security Administration. Frequently Asked Questions About the Social Security Trust Funds They are backed by the full faith and credit of the federal government, the same guarantee behind Treasury bonds held by any other investor. The interest rate is set by a 1960 formula based on market yields of outstanding government obligations.
When the trust funds need cash for benefit payments, the Treasury redeems the securities.8Social Security Administration. What Are the Trust Funds Interest income made up about 5% of the Old-Age and Survivors Insurance fund’s total revenue in 2024.9Social Security Administration. A Summary of the 2025 Annual Reports
Federal Income Tax on Benefits
Higher-income retirees put money back into the system through federal income tax on their Social Security checks. Whether your benefits are taxable depends on your “combined income,” defined as your adjusted gross income, plus any tax-exempt interest, plus half of your Social Security benefits.10Office of the Law Revision Counsel. 26 USC 86 – Social Security and Tier 1 Railroad Retirement Benefits
Two tiers apply. Up to 50% of benefits can be taxed for single filers with combined income between $25,000 and $34,000, or married couples filing jointly between $32,000 and $44,000. Up to 85% can be taxed for single filers above $34,000, or joint filers above $44,000. These thresholds were set by statute and have never been adjusted for inflation, so they pull in more retirees every year.
The revenue doesn’t disappear into the general federal budget. Federal law channels it back into the Social Security trust funds, so wealthier retirees help finance the benefits of everyone else.11Internal Revenue Service. IRS Reminds Taxpayers Their Social Security Benefits May Be Taxable In 2024, taxation of benefits accounted for about 4% of the OASI fund’s income.9Social Security Administration. A Summary of the 2025 Annual Reports
Some states also tax benefits. Most don’t: 42 states and the District of Columbia fully exempt them, and eight states impose at least partial taxes depending on income. State rules vary, so check your own separately.
How the Money Is Divided Once It Comes In
Social Security actually runs two trust funds, both managed by the Treasury. The Old-Age and Survivors Insurance Trust Fund pays retirement and survivors benefits, and the Disability Insurance Trust Fund covers workers who can no longer work due to long-term medical conditions.8Social Security Administration. What Are the Trust Funds Of the 12.4% combined payroll tax, 10.6 percentage points go to OASI and 1.8 percentage points go to DI. Congress has occasionally adjusted the split to shore up one fund or the other.
Overhead is small. Administrative expenses have consistently stayed at or below 1% of total costs since 1989. In 2024, administrative spending was 0.5% of the program’s total outlays, and 99.5% went directly to benefit payments.12Social Security Administration. Social Security Administrative Expenses
What Happens When Revenue Falls Short
The retirement fund is on a countdown. According to the 2025 Trustees Report, the OASI Trust Fund can pay full scheduled benefits until 2033. After that, incoming payroll taxes would still cover about 77% of promised benefits, leaving a 23% gap that would need either new revenue or benefit reductions.9Social Security Administration. A Summary of the 2025 Annual Reports The Disability Insurance fund is in much better shape, projected to remain solvent through at least 2099.
This isn’t a cliff where checks suddenly stop. Payroll taxes keep coming in and keep paying most benefits. But a 23% cut to retirement income would hit millions of people hard, which is why the solvency gap draws so much attention.
The Social Security Administration publishes actuarial estimates for dozens of possible fixes, each measured by what share of the long-range shortfall it would close.13Social Security Administration. Summary of Provisions That Would Change the Social Security Program Raising the combined payroll tax rate from 12.4% to 16.4% would eliminate the entire shortfall. Removing the wage base cap so the 12.4% tax applied to all earnings would close about 67% of the gap. Gradually raising the full retirement age to 69 could close roughly 24%, depending on the phase-in. Tying initial benefits to price inflation rather than wage growth would close about 74% but significantly reduce future benefit levels over time. Requiring newly hired state and local government employees to participate would address about 4%. No single fix has the political support to pass alone, and the longer Congress waits, the larger the adjustments will need to be.