Self-Employed Tax Tips for Social Security: What You Need to Know
Taxes can become a complex issue for the self-employed. While traditionally employed workers can expect their workplaces to handle tax tasks, the buck stops with you when you're working for yourself. Understanding your tax responsibilities is just one of several essential self-employed tax tips you need to follow.
Here's what you need to know about Social Security and taxes if you own and operate your own business.
How self-employment affects Social Security benefits
Even if you're working for yourself, you're still expected to pay into the Social Security system via taxes. According to the Social Security Administration (PDF), employees at traditional workplaces see 6.2% of their gross income (up to a maximum of $142,800) taxed for Social Security, plus an additional 1.45% taxed for Medicare. That means a traditional employee earning $50,000 per year would be taxed $3,825 total for Social Security and Medicare—or $3,100 for Social Security and $725 for Medicare. However, the worker's employer is also required to pay 6.2% and 1.45% toward these programs, making the total tax contribution 12.4% for Social Security and 2.9% for Medicare, or 15.3% total.
As a self-employed individual, you're both employer and employee. That means you must pay the full 15.3% of your gross income to cover the tax contribution to Social Security and Medicare. However, if you only make $400 or less annually from your own business ventures, you don't owe these taxes.
Deductions and other tips
Owing both the employer and employee portions of Social Security tax contributions may seem onerous, but the IRS provides some important deductions to the self-employed—starting with how earnings are defined. You will only owe taxes on your net earnings, which are equal to your gross income minus your business expenses.
From there, you can also generally expect to only pay Social Security and Medicare taxes on 92.35% of your net earnings. If your net earnings were $100,000, you would only be expected to pay Social Security taxes on $92,350 of it. That means you'd owe $11,451 in Social Security taxes (equal to 12.4% of $92,350), rather than the full $12,400 you might expect.
Furthermore, you can consider half of that Social Security taxation (equal to $5,726 in this case) a business expense, given that it's the employer contribution toward Social Security. As a business expense, paying this taxation doesn't reduce your net earnings, but it can lower your adjusted gross income, thereby reducing your income tax burden.
While traditionally employed workers will often only need to use the basic 1040 form to file taxes, the self-employed need to use additional forms to make sure they file their taxes correctly. These forms may include:
- Schedule SE (Form 1040) (PDF)
- Schedule 2 (Form 1040) (PDF)
- Schedule C (Form 1040), Profit or Loss From Business (PDF)
Knowing when to seek help
Partnering with a tax professional can help you navigate these issues, especially if you're new to self-employment. Working with a professional who has training and experience with tax code can be reassuring, as you know you're filing correctly and taking advantage of all the deductions available to you.
When working for yourself, it's vital to have the right self-employed tax tips to help you pay your taxes correctly. Understanding the requirements for Social Security and other taxes, what deductions are available, and which forms you need will help you feel confident about paying your self-employment taxes.
Financial insights for your business
This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.