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 everyone that works, if you're self-employed, you're required to pay Social Security taxes. These taxes go toward the federal Social Security program, which provides retirement, disability, and emergency benefits to older people and their families.

Find out how much you'll pay in Social Security taxes if you're self-employed, how to do so, and how to claim your benefits.

Key Takeaways

  • Self-employed people are required to file Social Security taxes. Since they are their own employers, they have to pay the employer's portion of the tax as well.
  • Self-employed workers can claim Social Security benefits via the same routes as a traditional W-2 employee.
  • Social Security benefits might decrease if you take them out before the full retirement age of 67; benefits may increase if you wait to take them until you're at least 70.

How Do Self-Employed Workers Pay Social Security Taxes?

If you own a business, freelance, or work for yourself, you are self-employed. That means that 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, you and your employer pay 6.2% of your wages. Additionally, you each pay 1.45% in Medicare tax on all earnings. The employer typically deducts these amounts from your paycheck and handles the tax filings. 

You're only taxed on income up to $142,800 ($147,000 in 2022) for Social Security.

As the employer and employee, you're responsible for paying the combined amount. In this case, you must pay the 12.4% of net earnings as Social Security taxes on income up to $142,800 ($147,000 in 2022), as well as a 2.9% Medicare tax. In addition, if you earn more than $200,000 individually or $250,000 (married filing jointly), you must pay .9%  more in Medicare taxes. Collectively, Social Security and Medicare taxes are called “Self-Employment Taxes.”

If you earn more than $400 in a year, you must report the earnings and file your tax return directly to the IRS using Form 1040. The self-employed must file an annual return, as well as quarterly estimated tax payments. To pay your estimated quarterly taxes, you can use an income tax professional or the IRS' Electronic Federal Tax Payment System (EFTPS).

Some self-employed people, 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.

Here's a table that shows the difference in how self-employed people's tax's are broken down compared to a W-2 employee's.

  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 ($200,000 or couples earning $250,000) 3.8% 2.35%
Taxable Cap $142,800 ($147,000 in 2022) No cap

Social Security Credits for Self-Employed Workers

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

There is a set yearly amount of earnings needed for Social Security credits, and the amount increases annually with average earnings levels. In 2021, each $1,470 of earnings will get you one credit, up to the maximum of four credits per year.  In 2022, the amount of earnings needed for one work credit will increase to $1,510.

Retirement Benefits 

The number of credits you need to be eligible for benefits depends on your age and the type of benefit you seek. For 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. 

The Social Security Administration (SSA) suggests contacting them to find out if you are eligible for survivor or disablility benefits and how they work.

Disability Benefits 

To qualify for Social Security disability benefits, you have to calculate your credits based on the age you became disabled and how long you’d been working previously. For example, if you become disabled before age 24, you'll need one-and-a-half years (six credits) in the three years before the condition that keeps you from working occurred. If you were 31 or older, you'd 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 children with disabilities may be able to claim a deceased relative’s Social Security benefits. The deceased will typically have had to work for 10 years before they passed—however, circumstances vary.

Self-Employed Social Security Benefits 

To calculate how much you've earned in retirement benefits, the SSA looks at the average monthly income during the 35 years you earned the most.  

Next, a formula is used to determine your monthly payout, called the primary insurance amount. The result is how much you would receive at your full retirement age. 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 the year you were born.

If you wait to take your benefits until you are at least 70, your amount will increase, earning you as much as 30% extra in benefits. However, if you claim benefits before retirement age the amount you receive will decrease.

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

How To Claim Your Benefits

If you're self-employed, you claim your 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, because the SSA will deduct $1 from a worker’s benefits for every $2 earned above $18,960.

When you're self-employed, you only count a payment as income when it is received. For example, if you did some freelance work in December of 2021 but didn't receive payment for it until January 2022, you would report that income on your 2022 taxes.

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 on up to $142,800 of income ($147,00 in 2022); you also pay a 2.9% Medicare tax. If you earn more than $200,000 (or couples earning more than $250,000) you'll 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. You can use the IRS' EFTPS to file.

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

Yes. The self-employed have to pay Social Security and Medicare taxes, generally known as “self-employment” taxes.

Article Sources

  1. Internal Revenue Service. "General Instructions for Forms W-2 and W-3 (2021)." Accessed Oct. 25, 2021.

  2. Social Security Administration. "2022 Social Security Changes." Accessed Oct. 25, 2021.

  3. Social Security Administration. "If You Are Self-Employed," Page 1. Accessed Oct. 25, 2021.

  4. Internal Revenue Service. "Self-Employment Tax (Social Security and Medicare Taxes)." Accessed Oct. 25, 2021.

  5. Social Security Administration. "If You Are Self-Employed," Page 2. Accessed Oct. 25, 2021.

  6. Social Security Administration. "Quarter of Coverage." Accessed Oct. 25, 2021.

  7. Social Security Administration. "How You Earn Credits," Pages 2-4. Accessed Oct. 25, 2021.

  8. Social Security Administration. "Starting Your Retirement Benefits Early." Accessed Oct. 25, 2021.

  9. Social Security Administration. "How Work Affects Your Benefits," Pages 1-2. Accessed Oct. 25, 2021.