How Does Social Security Work When Self-Employed?

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Self-employed individuals have unique Social Security guidelines.

You are self-employed.

As such, you are no stranger to responsibility.

You wear a number of hats.

You work in billing, project management, customer relations, and sales.

According to a recent Investopedia article titled “How Social Security Works for the Self-Employed” the IRS recognizes your complex business situation.

The self-employed make all their Social Security contributions.
Those who are self-employed still contribute to Social Security.

They consider you both the employer and the employee.

What does this mean for Social Security?

It is your responsibility to withhold Social Security from your earnings.

You will have to pay the employee contribution and the employer match.

What if you do not receive a regular paycheck?

This is common.

You will pay the Social Security taxes in their entirety when you file your annual federal income tax return.

The IRS Schedule SE is where the self-employed report their net profit or loss as calculated on Schedule C.

This is how the federal government calculates your future benefits.

How much will you owe?

The employee and employer Social Security rates are both 6.2 percent for a total 12.4 percent.

You will be responsible for paying into Medicare as well.

The employer and employee Medicare rates are both 1.45 percent.

The total between these two is 2.9 percent.

[By the way, did you notice that I like to show off my “math skills,” especially when the margin for error is low?]

The tax rate for these government program will be 15.3 percent.

The amount owed is derived from your net income when self-employed.

On the Schedule SE, you will multiply your profit or loss calculated on Schedule C by 92.35 percent.

With the CARES Act, employers can defer the employee Social Security taken through December 31, 2020.

Half of the deferred amount will be due by December 31, 2021.

The second half must be paid by December 31, 2022.

The deferral also applies to those who are self-employed.

Do you need to reduce your tax liability?

There are several ways you can do this.

There are trade offs.

If you pay less into Social Security, it will be included in your earnings history and reduce the amount of Social Security income you will receive in retirement.

There are no Social Security taxes on wages exceeding a specified threshold.

In 2020, this threshold is $137,700.

Any amount earned above this amount is exempt from Social Security taxes.

When it comes to Social Security, those who work for themselves and those who are employed earn credits the same way.

The biggest difference involves the business tax deductions.

Social Security will only cover some of your expenses in retirement.

If you are self-employed, you should also save independently for retirement.

I strongly recommend that you work with an experienced financial advisor to help through your savings and investing journey to and through retirement.

Reference: Investopedia (April 29, 2020) “How Social Security Works for the Self-Employed”