Do Self-Employed Workers Pay Social Security Taxes?
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All self-employed workers must pay Social Security taxes, just like individuals who work for an employer. Those who work for an employer split their Social Security tax burden down the middle, while self-employed workers are responsible for both halves.
And because self-employed workers pay Social Security taxes, they’re entitled to Social Security benefits in retirement. Here’s what self-employed workers need to know about preparing their taxes.
Yes, self-employed workers with more than $400 in annual net earnings from their business must pay Social Security taxes. This also applies to self-employed workers who earned more than $108.28 from a church.
Self-employed individuals pay a 12.4% Social Security tax on up to $160,200 in net earnings in 2023, as well as a 2.9% Medicare tax on total net earnings. When combined, these two taxes are commonly referred to as “self-employment tax.” The current self-employment tax rate is 15.3%.
Those who work for an employer split their tax burden with their employer, with each paying a 6.2% Social Security tax. Workers and their employers also split the Medicare tax burden down the middle, with each paying 1.45% Medicare tax on all earnings.
The self-employment tax is in addition to income tax. Self-employed workers can deduct half of their Social Security tax from their gross income when calculating their income tax obligations.
Yes, self-employed workers are entitled to the same Social Security benefits that traditional workers receive. Benefits will depend on how much you pay into Social Security throughout your working years, as well as how much you earn throughout your lifetime.
To determine your benefits, the Social Security Administration calculates your average monthly income during your highest 35 years of earnings. Then, it uses that figure to calculate your primary insurance amount, the basis for your monthly benefit payments.
Tax season looks different for self-employed individuals.
You’ll most likely be required to pay taxes quarterly, instead of annually. Self-employed workers also must pay income tax. You can learn more about how to pay those taxes here.
At tax time, complete IRS Schedule C to determine your net earnings from self-employment for the year.
Then complete IRS Schedule SE to figure out how much in Social Security and Medicare taxes you owe on those earnings. The IRS uses Schedule SE to determine your monthly retirement benefits.
Here’s some good news, though: Self-employed workers are eligible for several tax deductions. You may be eligible for tax breaks on the cost of your home office, health insurance and even credit card interest from business expenses.