Do You Have to Pay Social Security Tax if You're Self-employed?

When you’re an employee, Social Security tax is simple. It’s taken right out of your paycheck without much effort. But things can get more complicated when you’re self-employed. How is self-employment Social Security taxed and how do benefits accrue?

Are you considered self-employed? The IRS classifies “self-employed” as someone who runs a trade or business alone or under a partnership.

If you’re self-employed making more than $400 a year, you still pay Social Security. You also pay your share of the Medicare tax when you file your income taxes. Together both of those taxes are referred to as the “self-employment tax.” That means along with filling out a Schedule C form (profit or loss from a business), you’ll also complete a Schedule SE to determine your self-employment tax.

The IRS classifies you as “self-employed” if you run a trade or business by yourself or under a partnership.

How Much Self-employment Social Security Tax Will I Pay?

If you’re an employee, you pay 6.2% of your income in Social Security tax on the first $128,400 of your salary with an additional 1.45% for Medicare tax on your entire earnings. Then your employer pays in an equal amount of each. Being self-employed means you’re the employee and employer, so you pay 100%.

Are There any Tax Breaks?

Luckily, there are a few deductions you are able to make that reduce your tax bill and help take some of that extra Social Security tax away.

The first is the ability to reduce your net earnings by the employer’s portion of the Social Security and Medicare tax, so 7.65%. So if you made $50,000 in net earnings you only have to pay self-employment taxes on $46,175 of that amount ($50,000 X 92.35). Then you multiply that number by the combined Social Security and Medicare tax rate (15.3) for a total self-employment tax of $7,046.78.

The other break allows you to deduct the employer share of the self-employment tax from your income, since the IRS sees this as a business expense. In the example above, the individual can reduce their taxable earnings by half of that, so $3,523.39. That number will go in the adjusted gross income section of your Form 1040 where it says “Deductible part of self-employment tax.”

You’re still paying more, but those two deductions can help mitigate the extra expense. You also need to remember that you don’t pay the self-employment tax on every cent you bring in, only on the actual profits. Hint — that’s why it’s a good idea to keep a detailed record of any business expenses so you can enter them on your Schedule C and reduce your net income.

Do I Qualify for Benefits?

The Social Security Administration (SSA) uses “work credit” to determine your eligibility for benefits. The amount of work credits you need depends on your date of birth. The maximum is 40 credits. In 2018, for example, $1,320 was equal to one credit, just like other employees. You can earn up to four credits a year.

The actual amount you’ll receive through Social Security is based on lifetime earnings. The SSA calculates your average monthly earnings for the 35 years in which you earned the most money. Then it calculates your basic benefit amount based on those earnings.

It can be tricky to navigate how to calculate and complete your tax forms when you’re self-employed. Now that you have a better understanding of self-employment Social Security taxes, you can turn your attention to other business matters, like commercial insurance. But don’t worry, commercial insurance doesn’t have to be tricky. Reach out to your Farm Bureau agent for help!