Working for Yourself, Retiring with Uncle Sam: Social Security for the Self-Employed

triage-cancer-blog-self-employedAnyone who has ever worked for someone else has likely seen the Social Security deduction on their paystub (there are some employees who pay into a private retirement system). This is the tax that is automatically deducted from your pay check each pay period for Social Security retirement benefits. This money (6.2% from your employer and 6.2% from you) goes directly into the Social Security pot. We contribute now and then in retirement we receive a Social Security retirement benefit.  It’s a pretty seamless process.

But what if you’re self-employed?  If you operate a trade, business, or profession either by yourself or with a partner, you may be considered self-employed. Working for yourself can feel quite liberating, but it can be very confusing when it comes to paperwork.  Now that you’re writing the paychecks, you need to report your earnings and pay taxes to the IRS and Social Security Administration.  But how?

The simple answer is that you report your earnings for Social Security when you file your federal income tax return. If your net earnings are $400 or more in a year, you have to report your earnings on Schedule SE, in addition to the other tax forms you have to file.  And now that you’re working for yourself, you have to pay the entire 12.4% tax on up to $118,500 of your net earnings.

Don’t despair!  As a self-employed person, paying into Social Security allows you two income tax deductions.

  1. You can reduce your net earnings from self-employment by half the amount of your total Social Security tax. This means that you can take 6.2% off your net earnings (net earnings are you’re your gross earnings, minus any allowable deductions and depreciation). So if you report net earnings of $100,000, you can take $6,200 off that before you figure your Social Security tax.  This is similar to the way employees are treated under the tax laws, because the employer’s share of the Social Security tax is not considered wages to the employee.
  2. You can also deduct half of your Social Security tax on IRS Form 1040. But the deduction must be taken from your gross income in determining your adjusted gross income.

One of the benefits to paying into the Social Security retirement system in addition to having retirement benefits, is that if you are no longer able to work because of a medical condition, you may qualify for Social Security Disability Insurance.

This is an introduction to a complex topic, so we encourage you to talk to a tax or accounting professional.  You can also visit the Social Security Administration site, where they have a guide on this topic.

Congratulations on being your own boss and best of luck to you!

Similar Posts You May Like To Read:

    None Found

Triage Cancer
info@triagecancer.org