Q.  Don’t workers who have Federal Insurance Contribution Act (FICA) taxes withheld from their pay become “recipients of federal benefits” (and therefore taxable), since this entitles them to Social Security?

A.  No.  First of all, one is not a “recipient of federal benefits” until one actually “receives the federal benefits”.  (And, of course, even if one were already "receiving the federal benefits", only those measurable benefit receipts would be taxable.  The fact that certain of one's receipts are taxable does not make one's other receipts taxable.)

Second, contrary to the deep-seated misunderstanding of Social Security which is carefully nurtured by the beneficiaries of the overall “income” tax scheme, no one becomes “entitled” to Social Security by making ‘contributions’ (or any other way).  Thus, even a (necessarily tortured) argument that vestiture in a future benefit constituted an "income"-taxable activity would not apply to Social Security, because no one is legally vested with a claim against the program.

The fact is, there is no legal relationship between the tax taken under the FICA and any benefits one might be given under the same act.  When Social Security is called an “entitlement”, the reference is to a merely political deal-- those in Congress recognize that it would be political suicide to stop giving money away to (especially) seniors under the mantle of the FICA, and so the recipients of those handouts are “entitled” to rely on them continuing into the foreseeable future.  The FICA simply imposed another tax on "income", measured by remuneration paid to a particular group of federal workers (defined in section 3121).

(This class of remuneration was given the title of “wages", more particularly, FICA "wages", and is distinguished from the “wages” defined at 26 USC 3401.  3401 “wages” make up a broad and inclusive class (remuneration paid to all federal workers), within which is the subclass of FICA “wages”.  That is, all federal worker’s pay qualifies as 3401 "wages", but only some also qualifies simultaneously as 3121 "wages", and is used to measure the additional "income" tax.)

All that should be needed to make this clear is to consider that, if that were the case, once someone had reached nominal "full vestiture" -- that is "40 quarters of contributions" (per the current arbitrary qualification)-- one would be finished making "contributions".  If there actually was a contract involved, that would be the point at which the "contributor" would have satisfied his or her side of the bargain, with nothing more to do but wait until the payouts began.  In case more is needed than that simple and straightforward logic, here is what the United States Supreme Court says on the subject in Helvering v. Davis 301 US 619 (1937):

"The proceeds of both [employee and employer FICA] taxes are to be paid into the Treasury like internal-revenue taxes generally, and are not earmarked in any way."

...and in Flemming v. Nestor 363 US 603(1960):

"The noncontractual interest of an employee covered by the Act cannot be soundly analogized to that of the holder of an annuity, whose right to benefits are based on his contractual premium payments."

The court explains, also in Flemming v. Nestor, that:

"To engraft upon Social Security system a concept of 'accrued property rights' would deprive it of the flexibility and boldness in adjustment to ever-changing conditions which it demands..."

It's that simple.  There is no legal relationship of any kind between taxes withheld under the auspices of the FICA, and the receipt, or possible future receipt, of Social Security benefits-- and this is true even for those whose earnings really are "wages" as that term is defined in the law.

Congress could end Social Security payouts tomorrow, and no matter how many quarters of payments someone may have made, he or she would have no legal recourse by which to demand benefits.  No one has an account at the Social Security Administration, in the sense of a reserved or claimable interest in any benefit.  That the administration (or Congress) has elected to use "quarters of payments" as the nominal qualifier for receiving payments from the program is just the scheme de jure-- it could as easily be any thing else, and with just as much relationship to the benefit (from a legal standpoint) as the current scheme-- that is, none whatsoever.  The designers of this tax simply settled on marketing it as though it were an insurance program, both to make it more immediately palatable, and to help create a constituency which would defend it in the future with the vigor attendant upon an imagined “ownership” interest.  Without violating to the slightest degree its legal obligations under the Social Security Act or by virtue of the taxes it has collected under the name of "Social Security or Medicare contributions", Congress could announce tomorrow that benefits would henceforth be based on how many blue Volkswagens an applicant or current beneficiary had owned in the past (or owned now, for that matter).

Indeed, in 26 USC 86- Social Security and tier 1 railroad retirement benefits (a section within the "Items Specifically Included In Gross Income" part of Subtitle A), Congress must artificially designate Social Security benefits as to be treated as pension or annuity payments, for purposes of certain other sections of law, since such benefits don't actually qualify as pension or annuity payments inherently.

(f) Treatment as pension or annuity for certain purposes

For purposes of—

(1) section 22 (c)(3)(A) (relating to reduction for amounts received as pension or annuity),

(2) section 32 (c)(2) (defining earned income),

(3) section 219 (f)(1) (defining compensation), and

(4) section 911 (b)(1) (defining foreign earned income),

any social security benefit shall be treated as an amount received as a pension or annuity.

(Social Security numbers are merely a creative element of this scheme, by the way-- being nothing more than a number under which qualifying "quarters" are recorded, but suggesting to the gullible the existence of a personally-owned numbered "account" financed by the FICA tax "contributions" extracted.   However, as noted above, having such a number associated with oneself creates no ownership interest in any future benefits, nor does it have any legal affect on the character of one’s earnings-- that is, it does not make earnings, which otherwise are not, into either 26 USC 3121 “wages” or 26 USC 3401 "wages".)

*****

NOTE: Some are allowing themselves to be misled or distracted in regard to this subject by references to federal-retirement-benefit-vestiture within certain statutes, such as that at 5 USC 552a:

"(13) the term “Federal personnel” means officers and employees of the Government of the United States, members of the uniformed services (including members of the Reserve Components), individuals entitled to receive immediate or deferred retirement benefits under any retirement program of the Government of the United States (including survivor benefits)."

(which is, by the way, just a "this section only" specification relating to federal authority to keep records...).  Being shown the terms "entitlement" and "retirement benefits", they imagine that this language constitutes evidence that Social Security is an "entitlement" in a legal sense.  However, the programs referred to are not Social Security and Medicare, but rather are the "retirement program(s) of the Government of the United States" (provisions of which can be seen elsewhere in the same title).

*****

On another front, general misunderstanding of the true nature of Social Security, and of the context and meaning of language such as that in 5 USC 552a(13) is being abused with the promotion of the bizarre proposition that anyone having Social Security "income" taxes extracted from them are therefore "federal personnel", (and therefore are properly subject to the tax, in an interesting example of circular reasoning...), or are electing to be considered as such.  That is, the misunderstanding of Social Security to be a legal entitlement is exploited to suggest that the reference in 5 USC 552a(13) to those "entitled to receive immediate or deferred retirement benefits" should be read as including people who have paid Social Security taxes (and are therefore imagined to be vested in benefits under the program).  Then, goes the argument, since the subparagraph defines "federal personnel" as those "entitled to receive either immediate or deferred retirement benefits" (a class to which it is to be imagined those who have paid Social Security taxes belong), everyone who has paid Social Security taxes belongs, Presto Change-O!, to the class "federal personnel".

The "argument" concludes with the proposition that THIS is the clever mechanism by which Americans are made subject to the "income" tax (without any effort to address the fact that it is not merely "federal personnel" who are actually so subject, nor even are "federal personnel", except insofar as they engage in taxable activities).  To describe the reasoning is to make clear its illegitimacy.

Much as was done by with the abuse of the language of the first half of Treasury Decision 2313 to push the "861 argument", this distraction relies on its audience not verifying its assertions, and thus not noticing that the immediately preceding subparagraph of the very same section of statute DOES reference mere welfare programs such as Social Security.  That subparagraph specifically denominates programs of this sort as "federal benefit programs", distinguishing them from "retirement programs of the Government of the United States" (and without any references therein to "federal personnel" ):

"(12) the term “Federal benefit program” means any program administered or funded by the Federal Government, or by any agent or State on behalf of the Federal Government, providing cash or in-kind assistance in the form of payments, grants, loans, or loan guarantees to individuals;"

Although it is not necessary to further illuminate this distinction, elsewhere in the same statute a competent researcher will find language clearly doing just that, such as the following subparagraph of 5 USC 552a(o)(1):

(D) procedures for providing individualized notice at the time of application, and notice periodically thereafter as directed by the Data Integrity Board of such agency (subject to guidance provided by the Director of the Office of Management and Budget pursuant to subsection (v)), to—

(i) applicants for and recipients of financial assistance or payments under Federal benefit programs, and

(ii) applicants for and holders of positions as Federal personnel,