How Social Security Works for the Self-Employed

Here's how to budget for Social Security tax if you're self-employed

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Like all workers, self-employed individuals are required to pay Social Security taxes. These taxes go toward the federal Social Security program, which provides retirement, disability, and emergency benefits to older individuals and their families.

Find out how much self-employed individuals have to pay in Social Security taxes, how to do so, and how to claim the associated benefits, below.

Key Takeaways

  • Self-employed workers are required to file Social Security taxes, and they usually have to pay double the amount paid by traditional workers.
  • Self-employed workers can claim Social Security benefits via the same routes as a traditional, W-2 employee.
  • Social Security benefits might decrease if a worker takes them out before the standard retirement age of 66, and they may increase if one waits to take benefits out until they are at least 70.

How Do Self-Employed Workers Pay Social Security Taxes?

If you own a business or profession, you are a self-employed individual. That means that, come tax season when you file your federal income tax return, you must report your earnings for Social Security.

In a typical job arrangement where an employer sends you a W-2 form, an employer and employee will each pay 6.2% of the employee’s wages, or up to $142,800, to Social Security. Additionally, each party pays 1.45% in Medicare tax on all earnings. The employer will typically deduct these amounts from the employee’s paycheck and will handle the tax filings. 

Self-employed workers typically spend more money on Social Security taxes than a traditional employee, since they are not splitting the costs with an employer.

Self-employed individuals, on the other hand, are responsible for paying the combined employer and employee amount. In this case, you must pay the 12.4% of net earnings to Social Security taxes, or up to $142,800, as well as a 2.9% Medicare tax. If you earn more than $200,000 individually or $2,500 as a married couple sharing ownership of a business, you must pay .9%  more in Medicare taxes. Collectively, Social Security and Medicare taxes are referred to as “Self-Employment Taxes.”

If a self-employed individual earns more than $400 in a year, they must report these earnings and file their own individual tax returns directly to the IRS using Form 1040. Self-employed workers must file an annual return, as well as quarterly estimated tax payments. 

Some self-employed workers, including those who combine farming and non-farming income, can opt to funnel their income toward Social Security even if they make under $400 in a year.

  Self-Employed Individuals W-2 Employees
% net earnings taxed on SS   12.4% 6.2%
% net earnings taxed on Medicare  2.9% 1.45%
% net earnings taxes on Medicare for those earning $200,000 or couples earning $250,000 3.8% 2.35%
Taxable cap $142,800 No cap

Social Security Credits for Self-Employed Workers

The Social Security Administration (SSA) adheres to a credit system to determine workers’ benefits eligibility. The systems differ depending on the type of benefit being sought. However, the same credit systems apply to self-employed and traditionally employed workers.

There is a set yearly amount of earnings needed for Social Security credits, and the amount increases slightly annually as average earnings levels increase. In 2021, each $1,470 of earnings will get you one credit, up to the maximum of four credits per year. 

Retirement Benefits 

The amount of credits you need to be eligible for benefits will depend on your age and the type of benefit you seek. In terms of retirement benefits, anyone born after 1929 must have earned 40 credits—or engaged in 10 years of work—to gain access to their retirement benefits. 

Disability Benefits 

To qualify for Social Security disability benefits, workers must calculate their credits based on what age they were disabled, and how long they’d been working previously. Those who become disabled before age 24 will need one-and-a-half years or six credits of work compiled in the three years prior to disability, for example, while those disabled at age 31 or older will generally need at least 20 credits from the previous 10 years.

Survivor Benefits

Under certain circumstances, survivors such as widows who are caring for young children, divorced spouses, or disabled children may be able to claim a deceased relative’s Social Security benefits. Unless the individual was very young, they will typically have to have worked for 10 years before they passed—however, circumstances vary.

To better understand if you are eligible for survivor benefits and how they work, the SSA suggests contacting the agency. 

Self-Employed Social Security Benefits 

To calculate how much a worker has earned in retirement benefits, the SSA looks at the average monthly income during the 35 years in which the worker earned the most.  

Next, the organization uses a formula to determine a worker’s monthly payout called the primary insurance amount. The resulting amount is how much you would receive at your full retirement age, which varies depending on your date of birth. While you can start receiving Social Security retirement benefits as early as 62, you are entitled to full benefits when you reach full retirement age—between 66 and 67 depending on when you were born.

If you wait to take your benefits until you are at least 70, your benefit amount will increase, earning you as much as 30% extra in benefits. If a worker claims benefits before retirement age, though, the amount received will decrease.

The formula for determining Social Security benefits is the same for traditionally employed and self-employed workers.

How To Claim Your Benefits

Self-employed individuals claim Social Security benefits via the same route as traditional employees. Workers can apply for benefits online or by calling the SSA.

Those who are at full retirement age or older may keep their benefits even if they continue to work and earn money. However, those younger than full retirement age will run into an income cap if they continue to work: The SSA will deduct $1 from a worker’s benefits for every $2 earned above $18,960.

For self-employed workers, income only counts when it is actually received (your net earnings), unlike a traditional worker who must report their income as wages earned. For example, if a self-employed worker earns income through a job in 2021 but does not receive the payment until 2022, the income should be reported in 2022. Conversely, a W-2 worker would report those earnings in 2021.

Frequently Asked Questions (FAQs)

How much is Social Security tax for the self-employed?

Social Security tax for the self-employed is 12.4% of net earnings, or up to $142,800, as well as a 2.9% Medicare tax. Individuals earning more than $200,000 or couples earning more than $250,000 will have to pay .9% more in Medicare tax.

Where do I pay Social Security taxes if I’m self-employed?

Self-employed workers must file their taxes with the IRS every year, in addition to estimated taxes every quarter. Filers should use Schedule SE Form 1040 to submit their Social Security taxes.

Do you have to pay Social Security and Medicare taxes when self-employed?

Yes. Self-employed individuals must pay Social Security and Medicare taxes, which are generally known as “self-employment” taxes.