Social Security is a federal program designed to provide financial relief during retirement. It is also used to financially assist disabled citizens, survivors and dependents.
Funds paid into the system are used to pay people who are already collecting benefits. As of 2018, if you work for someone else, you must pay 6.2 percent of your income to Social Security. Your employer must pay an equal amount on your behalf for a total of 12.4 percent. The 6.2 percent you are required to personally pay is automatically deducted before you receive each paycheck. Therefore, the necessary work is done for you. That is not the case if you are self-employed.
As a self-employed worker, you must pay into the Social Security system yourself. There are several differences in the process, including how much you have to pay and how you must make your payments. It is important to follow the proper procedures to ensure you receive the benefits you need when you finally retire. Below is more information you need to know about self-employment and Social Security collection.
Learn About Self-Employment Social Security Tax Payment Amounts and Benefits
The Social Security tax when you are self-employed is the full 12.4 percent. However, you only need to pay Social Security tax on your earnings up to a certain earnings cap, which is subject to change. It is also worth noting Social Security tax is paid with a Medicare tax of 2.9 percent if you are self-employed. Therefore, your total payment is 15.3 percent. If you are employed by a separate company, you are responsible for paying half that Medicare tax. Payment of the full percentages of Social Security and Medicare tax is required if you are self-employed because you are legally considered an employer and employee.
The need to pay the employer and employee Social Security tax when self-employed may seem unfair. You may also have financial concerns regarding whether doing so is even possible, particularly if your self-employment earnings are low. However, you are eligible for tax deductions due to self-employment that can help you reduce those costs. One deduction is automatically performed when you file your taxes. At that time, half the total amount you owe for Social Security is deducted from the net self-employment earnings you report. The second deduction allows you to deduct half of the amount you pay for the Social Security Tax. To do so, you must:
- File IRS Form 1040 when filing your annual income taxes.
- Not use itemized deductions to calculate the deductible amount.
- Deduct the amount from your gross reported income.
How to Decide Whether to File Tax Deductions for Social Security
The ability to file deductions to decrease your Social Security system tax payment can be useful. However, it can also be detrimental, and the deduction requests are optional. It is important to consider both options carefully before choosing how to file. One reason you may not want to take deductions now is the benefits you receive through Social Security are based on up to 35 years of earnings. If you work for more than 35 years, the years during which you earned the highest amounts are counted when determining how much you can collect. You may have formerly been employed by a company at which you earned more money per year than you are currently earning as a self-employed worker. If so, requesting Social Security tax deductions now may benefit you. However, if your earnings are higher now than they used to be, or you have not yet worked for 35 total years, requesting deductions can reduce the amount you are eligible to collect when you retire.
You must also be aware the Social Security system is constantly subject to change. Due to its unpredictable nature, trying to figure out how much you may be eligible for later can be a difficult, if not futile, pursuit. Requesting tax deductions on your current tax return offers you the chance to save some money right now. Those results are predictable. Therefore, that course of action may be more desirable to you.
About Self-Employment Social Security Filing Variations
If you earn more than $400 per year in net earnings, you are required to pay Social Security tax when you file your annual income taxes. You are also required to report any other income you have, such as income from a work-from-home job or part-time job, when filing. As of 2018, if you have self-employment and wage earnings and the total amount earned is more than $128,400, the wage tax is paid first. Your employer pays half of it.
If you earn less than $400 per year while self-employed, you may still wish to contribute to Social Security. The Internal Revenue Service (IRS) allows you to do so. However, you may only file Social Security tax on income under $400 per year five times in your lifetime, unless the income is from farming. All farming income can be reported with no limitations on the number of years that can be claimed.
How to File Social Security Taxes When Self-Employed
When self-employed, you must file your Social Security taxes annually at the time when income taxes must be reported, which is typically by April 15 except when that date falls on or near a holiday. Your Social Security tax information must be filed, even if you do not own income tax for the year. To pay your Social Security tax you must submit the:
- Individual Income Tax Return, also known as Form 1040.
- Self-Employment tax form called Schedule SE.
- Profit or Loss from Business or Profit or Loss from Farming form, known as Schedules C and F, respectively.
The IRS provides online access to each of those forms. You or your accountant or tax specialist must print them and fill them out. The forms must each include your personal contact information and identifying characteristics, such as your Social Security number. Your income information must also be listed as requested accurately on each form. After filling out the required forms, submit them to the IRS with the required Social Security tax payment, which is calculated using your earnings data.
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