Social Security, Medicare and unemployment insurance are programs set up by federal and state governments to protect people who are no longer employed due to old age, disability or economic conditions. For Social Security and Medicare, the employer and the employee are both pay federal taxes to fund future benefits for the employee. For unemployment insurance, the employer pays federal and state taxes based on a percentage of the employee's wages.
Congress created the Social Security system by enacting the Social Security Act of 1935, 42 U.S.C.S. § 301 et seq. That act has been amended many times since then. The Social Security system consists of numerous programs which provide for the needs of individuals and families and which protect aged and disabled persons from the costs of illnesses.
Some of these programs include:
- Social Security (retirement, survivors, and disability insurance)
- Medicare (hospital and medical insurance for the aged, the disabled, and those with end-stage renal disease)
- Unemployment insurance
- Supplemental Security Income (SSI)
Wage earners who are aged or are disabled are eligible for benefits under the Social Security and Medicare programs if their employment record shows earned income for the required number of quarters (three-month periods), and for old-age claimants, if they also meet the minimum age requirements. For example, in order to receive Social Security disability insurance benefits, a person must be fully insured. A person is fully insured for Social Security coverage if he has the required number of quarters credited to his Social Security earnings record. To be fully insured, a person needs at least six quarters of coverage, but not more than 40 quarters of coverage. The person has to file a claim with the Social Security Administration, which decides if his or her disability warrants disability insurance payments.
Both the employer and the employee (or the self-employed person) are required to pay Social Security taxes under the Federal Insurance Contributions Act (FICA). Generally, the employer withholds a specified percentage of the employee's wages from the employee's paycheck and then matches that amount from the employer's funds. The employer then remits the combined amount to the federal government.
Trust Funds Available for Benefits
Social Security and Medicare benefits are available to former wage earners, employees or self-employed individuals from trust funds set up by the federal government. These trust funds are made up of Social Security taxes collected from employers and self-employed individuals. When Social Security taxes are paid, amounts equivalent to those taxes are deposited in three separate trust funds:
- The Federal Old-Age and Survivors Insurance Trust Fund
- The Federal Disability Insurance Trust Fund and
- The Federal Hospital Insurance Trust Fund
The Federal Hospital Insurance Trust Fund also receives the amounts appropriated from general revenues on account of "uninsured" persons age 65 and over.
A fourth fund, the Federal Supplementary Medical Insurance Trust Fund, receives the amounts collected as premiums for medical insurance coverage as well as the amounts appropriated from general revenues to cover the Government's share of the cost of the program.
Unemployment Insurance Program
The unemployment insurance program provides partial income replacement for a limited period to persons who become unemployed. It is a state-administered program with Federal participation. The program is funded with taxes paid by employers under the Federal Unemployment Tax Act (FUTA) and state laws.
If a state has an unemployment insurance law that meets the basic provisions of the federal law, employers can pay their state taxes and credit their state taxes against the federal tax. Employers may continue to receive this tax offset as long as their state unemployment insurance systems conform to the general requirements under federal law. This offset also extends to the taxes the employer is excused from paying under state law due to the employer's "experience rating," which is based on the employer's experience with unemployment.
Each state specifies in its own laws:
- Who may receive unemployment benefits
- How each worker can qualify for benefits
- The amount of the weekly unemployment benefit
- The maximum number of weeks for which unemployment benefits may be paid
The state unemployment insurance agency handles unemployment claims and pays the benefits.
Workers must comply with certain requirements in order to obtain unemployment benefits, such as registering for work at a state employment service office and filing a claim for benefits. Also, a worker must have a prescribed amount of employment or earnings in covered employment during a specified "base period," generally a year, prior to the time he or she claims benefits.
Supplemental Security Income (SSI)
SSI is a cash assistance program funded and administered by the federal government. In 1974, it replaced the prior federal/state matching grant program of adult assistance to the aged, blind and disabled. There is no minimum age limit in establishing eligibility on the basis of blindness or disability. However, the applicant's income and resources must be below specified amounts.
A person applying for SSI does not need insured status. SSI payments are paid from the general revenues of the U.S. and those states that supplement the federal benefits with state funds.
If you have any questions about employer contributions to Social Security, Medicare and unemployment insurance programs, contact a small business lawyer in your area.
Questions for Your Attorney
- What happens if I don't pay the employer amounts for my employees' Social Security taxes?
- Does an employer have to participate in hearings on a former employee's claim for Social Security insurance disability benefits?
- Is an employer penalized if its former employees file claims for unemployment insurance benefits? How does the number of claims filed by my former employees affect the contributions that I'm required to make?