Social Security Guide for Self-Employed Workers

How to Pay Social Security Taxes

If you own a business or work as a freelancer, you are considered a self-employed worker. This means that when you file your federal income tax return, you must report your income for Social Security.

In a regular job where your employer sends you a W-2 form, both you and your employer pay 6.2% of your wages. Additionally, both of you pay 1.45% as a medical tax on all earnings. Typically, the employer withholds these amounts from your paycheck and handles the tax procedures.

Note: Taxes are only imposed on income up to $147,000 in 2022 and $160,200 in 2023 for Social Security.

As both employer and employee, you are responsible for paying the combined amount. In this case, you must pay 12.4% of your net earnings as Social Security taxes on income up to $147,000 in 2022 and $160,200 in 2023, plus a medical tax of 2.9%. Additionally, if you earn more than $200,000 individually or $250,000 (for couples filing jointly), you must pay an additional 0.9% as a medical tax. The total of Social Security and medical taxes is referred to as “self-employed taxes”.

If you earn more than $400 in a year, you must report the earnings and file your tax return directly with the federal tax authority using Form 1040. Self-employed individuals are required to file an annual return, along with quarterly estimated tax payments. You can use a tax professional or the electronic federal tax payment system (EFTPS) to pay estimated quarterly taxes.

Some self-employed individuals, including those who mix farm income with other income, may choose to direct their income toward Social Security even if they earn less than $400 a year.

Here is a table showing the difference in the distribution of taxes for self-employed individuals compared to those who receive a W-2 form.

Social Security Credits for Self-Employed Individuals

The Social Security Administration (SSA) adheres to a credit system to determine eligibility for benefits. The credit requirements vary depending on the type of benefit sought. However, the same credit system applies to both self-employed workers and traditionally employed workers.

There is a specific annual amount of earnings required for Social Security credits, and this amount increases annually with average earnings levels. In 2022, you will earn one credit for every $1,510 of earnings, up to a maximum of four credits in a year. In 2023, the amount of earnings required for one work credit is $1,640.

Social Security Benefits

The number of credits you need to qualify for benefits depends on your age and the type of benefit you are looking for. For retirement benefits, anyone born after 1929 must have earned 40 credits or worked 10 years to reach their retirement benefits.

Note:

The Social Security Administration (SSA) recommends contacting them to find out if you qualify for survivor or disability benefits and how they work.

To qualify for Social Security disability benefits, you must calculate your credits based on the age at which you became disabled and your previous work duration. For example, if you became disabled before the age of 24, you will need one and a half years (six credits) in the three years preceding the event that prevents you from working. If you are age 31 or older, you typically need at least 20 credits from the last ten years.

Under certain circumstances, survivors such as widows caring for young children, divorced spouses, or disabled children may be able to benefit from Social Security benefits of a deceased individual. Generally, the deceased must have worked for ten years before their death – however, circumstances may vary.

Social Security Benefits for Self-Employed Workers

To calculate how much you earn from retirement benefits, the Social Security Administration (SSA) looks at your monthly average earnings during the 35 years you earned the most. After that, a formula is used to determine the monthly amount you will receive, known as the primary insurance amount. The result is the amount you will receive when you reach full retirement age. While you can start receiving Social Security retirement benefits at age 62, you are entitled to full benefits when you reach full retirement age – between 66 and 67 years, depending on the year you were born.

Note: If you wait until you are at least 70 years old to claim your benefits, the amount will increase, allowing you to receive up to 30% extra in benefits. However, if you claim benefits before full retirement age, the amount you receive will decrease.

The formula for determining Social Security benefits applies to both traditional workers and self-employed workers.

How to Claim Benefits

If you are self-employed, you can claim Social Security benefits in the same manner as traditional workers. Workers can apply for benefits online or by contacting the Social Security Administration (SSA).

Those who are at full retirement age or older may keep their benefits even if they continue to work and earn money. However, individuals younger than full retirement age will face an income limit if they continue to work, as the Social Security Administration (SSA) will deduct one dollar from the worker’s benefits for every two dollars earned above $19,560 in 2022 and $21,240 in 2023.

When you are your own employer, you report the payment as income when you receive it. For example, if you did some freelance work in December 2022 and did not receive payment until January 2023, you must report that income on your 2023 tax return.

Frequently Asked Questions

What is the Social Security tax for self-employed workers?

The Social Security tax for self-employed workers is 12.4% of net earnings up to an annual limit. You also pay a Medicare tax of 2.9%. In total, this amounts to 15.3%, known as self-employment taxes. If you earn more than $200,000 (or couples earning more than $250,000), you will have to pay an additional 0.9% in Medicare tax.

Where do you pay Social Security taxes if you are self-employed?

Self-employed individuals must file their tax returns with the federal tax agency each year, in addition to estimated tax payments each quarter. Filers should use Schedule SE Form 1040 to report their Social Security taxes. You can use the Electronic Federal Tax Payment System (EFTPS) for making payments.

Does

Do you have to pay social security and Medicare taxes when you are self-employed?

Yes. Self-employed individuals must pay social security and Medicare taxes, commonly referred to as self-employment taxes.

Source: https://www.thebalancemoney.com/how-social-security-works-for-the-self-employed-5194580