If you are older and working for yourself while also receiving Social Security benefits, your benefits may increase or decrease. Working while retired also means you must continue to pay Social Security and Medicare taxes on your work income.
Who is a self-employed worker?
The Internal Revenue Service (IRS) states that a person is considered self-employed if they meet at least one of these criteria:
- Engaging in a trade or business as a sole proprietor (sole proprietorship) or independent contractor (as opposed to being an employee)
- Being a member of a partnership that is engaged in a trade or business
- Or otherwise doing business for yourself (including part-time businesses)
Self-employment also includes people who own other types of businesses, such as limited liability companies (LLCs). However, individuals who own a corporation or S corporation do not consider themselves self-employed as those people are shareholders.
Income Tax for Older Self-Employed Workers
If you have income from self-employment, you must report it to the IRS and pay taxes on it. This includes income from products you sell and services you provide to customers. One common type of income for sole proprietors is from Form 1099, usually Form 1099-NEC, which reports income earned from providing services.
Self-employment income is added to your personal tax return along with other income including any Social Security benefits you may receive. The net income from your business is calculated on Schedule C of this form.
Your net earnings from self-employment, for Social Security purposes, are your gross profits minus allowable deductions and depreciation for the business. Your self-employment earnings do not include:
- Profits from investments
- Interest from loans
- Rental income from properties unless you are a real estate dealer
- Income from a limited partnership
There is a special version of Form 1040 for seniors age 65 and older, referred to as Form 1040-SR. If you are filing taxes using tax preparation software, you will file your return using this form if you are over 65. Be sure to check that the form you are using includes Schedule C.
Working and Receiving Social Security
You can continue to work at your job and collect Social Security benefits. This income affects your retirement benefits in several ways.
It could lead to an increase in your benefits. The Social Security Administration (SSA) recalculates your benefits each year, and your self-employment income is included in that calculation. If this income is higher than in previous years, it could result in an increase in your benefit amount for the year.
Your self-employment income may also reduce your benefits if you are younger than full retirement age when you retire and earn more than the annual earnings limit. If you are below full retirement age for a given year, your benefit payments will be reduced by $1 for every $2 you earn over the limit.
Starting from the month you reach normal retirement age (age 66 if you were born between 1943 and 1954), you can earn as much as you want without having to pay back any Social Security benefits you receive.
Check with your local Social Security office for more questions about how self-employment affects your Social Security benefits in the future.
Self-Employment Taxes
Even though you may receive Social Security benefits, if you work for yourself, you still must pay Social Security and Medicare taxes, known as self-employment taxes, on your self-employment income. If you have $400 or more in net earnings from self-employment, you must also report that income on your tax return.
The most important
Something to remember about self-employment taxes: this tax is not withheld from your income as a business owner. You must calculate the self-employment tax you owe and pay that amount throughout the year. Many business owners pay estimated taxes quarterly to avoid penalties for underpayment.
Note: If you do not have a profit for a given year, you do not have to pay self-employment tax, but you also do not receive any Social Security benefits for that year.
Calculating Self-Employment Tax
The current self-employment tax rate is 15.3%. The Social Security portion is 12.4% up to the maximum Social Security limit (this rate changes each year). The Medicare rate is 2.9% with no maximum limit. Additionally, if your total income for the year from all sources exceeds $200,000, you must pay an additional 0.9% Medicare tax for that year.
You can deduct half of your total Social Security tax on Schedule SE. This deduction is designed to bring self-employed individuals in line with the half of Social Security that business owners pay for employees.
Note: If you have income from self-employment as well as a job as an employee, your self-employment income is calculated first if the total amount exceeds the Social Security maximum.
Frequently Asked Questions
How do you pay Social Security and Medicare taxes on self-employment income?
Self-employed individuals need to pay self-employment taxes for Social Security and Medicare each year based on their net income from their business. You will need to complete Schedule SE to calculate the tax amount and include it with your other information on your personal tax return (Form 1040 or Form 1040-SR for seniors). It becomes part of your total taxable income for the year.
If you do not have enough tax withheld from other income, you will need to pay estimated taxes quarterly to avoid penalties for underpayment.
How much can you earn from self-employment before needing to pay Social Security taxes?
If you earn $400 or more during the year from your work, you must file Schedule SE and pay self-employment taxes. If your net income from your business is less than $400 or you have a loss for the year, you do not have to pay these taxes, but you also do not receive Social Security benefits for that year.
What is the annual maximum for Social Security tax on self-employed individuals?
The annual maximum for Social Security tax changes every year. Your total income as an employee and your self-employment income are calculated to reach this amount. Employment income is calculated first. For example, the Social Security maximum for 2021 is $142,800. If you have $100,000 of employment income and $54,000 of self-employment income, only $11,200 of your self-employment income is counted.
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Sources:
- Internal Revenue Service (IRS). “Tax Center for Self-Employed Individuals.” Accessed August 4, 2021.
- Social Security Administration. “If You Are Self-Employed.” Accessed August 4, 2021.
- Social Security Administration. “Receiving Benefits While Working.” Accessed August 4, 2021.
- Social Security Administration. “Full Retirement Age.” Accessed August 4, 2021.
- Internal Revenue Service (IRS). “Self-Employment Tax (Social Security and Medicare).” Accessed August 4, 2021.
Source: https://www.thebalancemoney.com/self-employed-seniors-398798
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