6 Things You Must Know About Social Security If You’re Self-Employed

Vance Cariaga

Tue, Jun 20, 2023, 5:16 AM 4 min read

Social Security gets the vast majority of its funding — more than three-quarters — from payroll taxes. Most workers in the United States pay 6.2% of their wages into Social Security taxes, and that total is matched by employers. If you’re self-employed, however, you get hit with both taxes.

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That’s the main thing to remember about Social Security if you’re self-employed — you must pay the full 12.4% into the system on up to $160,200 of your annual earnings, according to the Social Security Administration. The good news is, that money goes toward the Social Security benefits you receive when you’re retired.

You are considered self-employed if you operate a trade, business or profession, either by yourself or as a partner. You report your earnings for Social Security when you file your federal income tax return.

Here are six other things you must know about Social Security if you’re self-employed.

1. Who Has To Pay Self-Employment Tax

You’re responsible for paying self-employment tax and filing Schedule SE (Form 1040 or 1040-SR) if either of the following applies, according to the IRS:

Your net earnings from self-employment (excluding church employee income) were $400 or more
You had church employee income of $108.28 or more

To pay self-employment tax, you must have a Social Security number or individual taxpayer identification number.

2. What Forms To Use

If you are self-employed as a sole proprietor or independent contractor, you typically use Schedule C to figure net earnings from self-employment, according to the IRS. If you have earnings subject to self-employment tax, you will use Schedule SE to figure your net earnings from self-employment. Before you figure your net earnings, you’ll need to determine your total earnings subject to self-employment tax.

3. How To Determine Net Earnings

Net earnings for Social Security are your gross earnings from your trade or business, minus your allowable business deductions and depreciation. Income from the following sources doesn’t count toward Social Security and shouldn’t be included in your net earnings:

Dividends from shares of stock and interest on bonds, unless you receive them as a dealer in stocks and securities
Interest from loans, unless your business is lending money
Rentals from real estate, unless you’re a real estate dealer or regularly provide services mostly for the convenience of the occupant
Income received from a limited partnership

4. Who Must Pay Estimated Taxes

Most self-employed workers are required to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed, according to the IRS. For estimated tax purposes, the year is divided into four payment periods, typically once a quarter. Each period has a specific payment due date. If you don’t pay enough tax by the due date for each of the payment periods, you might be charged a penalty even if you are due a refund when you file your return. See the worksheet in Form 1040-ES, Estimated Tax for Individuals for more details on who must pay estimated tax.

5. Deductions for Self-Employment Tax

There are two income tax deductions that reduce your taxes when you’re self-employed, the SSA noted:

Your net earnings from self-employment are reduced by half the amount of your total Social Security tax. This helps ease the blow of having to pay the employer’s share of Social Security taxes.
You can deduct half of your Social Security tax on IRS Form 1040. However, the deduction must be taken from your gross income when determining your adjusted gross income. It can’t be an itemized deduction and should not be listed on your Schedule C.

If you file a Form 1040 or 1040-SR Schedule C, you might also be eligible to claim the Earned Income Tax Credit (EITC), according to the IRS.

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6. Self-Employment Health Insurance Tax Deduction

As the IRS noted, Section 2042 of the Small Business Jobs Act allows self-employed individuals to deduct the cost of health insurance. This deduction is taken into account when calculating net earnings from self-employment. Instructions for calculating and claiming the deduction are available on Form 1040 or 1040-SR and Schedule SE.

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