The major source of income to the Social Security Trust Funds is employment taxes, specifically taxes on wages as defined in the Federal Insurance Contributions Act (FICA) and taxes on self employment as defined in the Self Employment Contributions Act (SECA). The following describes how these Social Security taxes are deposited into the trust funds.

Employers are not required to distinguish Federal income taxes from Social Security taxes when they deposit taxes with Federal Reserve banks. Thus, Social Security taxes are first deposited in the trust funds on an estimated basis and are later adjusted to reflect actual employment data. By law, Social Security taxes must be based on employment records maintained by the Social Security Administration (SSA), not on the actual amount of taxes collected by the Internal Revenue Service (IRS).

Estimates and deposits
The Social Security Administration (SSA) estimates future tax liability by calendar year and trust fund. SSA also estimates the portion of tax liabilities that will be collected quarterly. SSA sends these estimates to the Department of the Treasury, where the estimated quarterly tax collections are split into monthly tax collections. For each month, Treasury also splits the estimated tax collections into estimated tax liability amounts.

Treasury also estimates Federal income taxes withheld by month and computes monthly ratios of FICA taxes, one for each trust fund, to the sum of FICA taxes and income taxes. Then Treasury multiplies each day's actual tax receipts by each ratio, yielding the estimated FICA part, and deposits that part into the appropriate trust fund. If the sum of such daily deposits reaches the month's estimated total before the end of the month, no more taxes are deposited in that month. On the other hand, if the sum fails to reach the month's estimated total, extra money is deposited on the last day of the month to make up the shortfall. Either way, the estimated amount for a month is the total amount deposited. The same method is applied to SECA taxes.

For each month, Treasury estimates the portion of FICA taxes deposited that represent

  • liability for that month's calendar quarter, and
  • the remaining portion (if any) representing liability for the previous quarter.
Quarterly tax liabilities are the appropriate sums of monthly liabilities and form the basis for subsequent FICA tax adjustments.

Similarly, Treasury estimates the portion of SECA taxes deposited that represent

  • liability for that month's calendar year, and
  • the remaining portion (if any) representing liability for the previous year.
Annual tax liabilities are the appropriate sums of monthly liabilities and form the basis for subsequent SECA tax adjustments.

Adjustment of estimated tax liability
SSA collects wage data from three sources.

  • W-2s processed by SSA provide individuals' wage information by calendar year.
  • Employee tips and wages, not reported by employers, but reported on employee tax returns (Form 4137); IRS processes the data and sends them to SSA.
  • Forms 941 processed by IRS provide aggregate wage data by calendar quarter. IRS sends the processed data to SSA four times per year.

SSA certifies aggregate earnings (wages and self-employment income) in letters sent quarterly to Treasury. Each such certification letter contains data for prior years, back to 1937, to the extent that the current earnings data differ from amounts previously certified. As there are generally fewer corrections (positive or negative) to earnings for years that are further in the past, certified earnings amounts become progressively smaller for years that are further in the past, and may include negative amounts.

SSA combines quarterly 941 data to provide annual totals comparable to the other wage data reported annually. In general, SSA then certifies the data from the source that provides the higher wage amount for a calendar year. Each certification letter shows wage data by calendar year, except for the most recent year shown. For this recent year, data are shown for the most recent reported quarter and data for other quarter(s) of the year (if any) are combined. Each letter also shows self-employment income by calendar year only.

To adjust FICA taxes for a particular quarter, taxes from the latest certification letter are compared to the estimated tax liability amount established by Treasury. This FICA tax liability for the quarter is subtracted from taxes on all wage data reported in a certification letter, including amounts for all previous quarters or years, and the difference is transferred either to or from a trust fund. The initial adjustment for a particular quarter occurs about one year after the close of that quarter. SECA taxes are adjusted similarly, except that the initial adjustment for a particular year is normally made in the last calendar quarter of the second following year.

The calculation of tax adjustments are done independently by Treasury and SSA. When agreement is reached, Treasury takes the steps necessary to transfer the funds.