Self-employment offers the freedom and flexibility to chart your own course, but it also comes with responsibilities—including managing your Social Security obligations.
If you own your own business, are a freelancer or a contractor, you might wonder if self-employed people pay into Social Security. Yes, they do.
Let's look at the details you need to know.
Do self-employed people pay into Social Security?
Self-employed people are required to pay into Social Security, but their obligations differ from those of traditional employees. If you were a traditional employee, you'd contribute 6.2% of your earnings to Social Security. Your employer would match that amount for a total contribution of 12.4%.
When you're self-employed, you wear both the employer and employee hats, which means you're responsible for paying the entire 12.4% of your net earnings.
While most self-employed individuals are required to pay these taxes, there are a few exceptions and nuances:
- Income threshold. If your net self-employment earnings are less than $400 annually, you're exempt from paying Social Security taxes.
- Maximum taxable earnings. In 2024, the
maximum earnings subject to Social Security tax is $168,600. - Exemptions. Some groups, such as
clergy members, may be exempt from Social Security taxes.
Understanding these details can help you ensure you're meeting your tax obligations and building toward your retirement.
How do self-employed workers pay Social Security?
As a self-employed person, you handle your Social Security contributions differently than a traditional employee. Instead of having taxes automatically withheld from your paycheck, you'll need to report your earnings and pay self-employment tax directly to the IRS.
The form you use to report earnings and calculate your self-employment tax is
Best practices for paying into Social Security
To stay on top of your obligations and avoid any surprises come tax season:
- Estimate your taxes. Paying estimated taxes throughout the year can help you avoid a large tax bill and potential penalties at the end of the year.
- Keep accurate records. Good record-keeping will help you track your income and business expenses to accurately calculate your net earnings and potential deductions.
- Get professional guidance. A qualified tax professional can help you navigate self-employment taxes and optimize your tax strategy.
What happens if you never pay Social Security taxes?
Not paying your self-employment taxes and covering what you owe in Social Security taxes can have consequences, such as:
- Penalties and interest. The IRS may impose penalties for late or missed payments, and interest may accrue on any unpaid taxes.
- Reduced Social Security benefits. Your future Social Security benefits are based on your earnings history and the taxes you've paid. Not paying self-employment tax can reduce your benefits.
- Collections. In severe cases of nonpayment, the IRS may use wage garnishment or asset seizure to recover unpaid taxes.
It's important to take your tax obligations seriously and pay self-employment taxes on time for your current financial plans and future Social Security benefits.
How do deductions affect Social Security taxes?
When you're self-employed, you have the flexibility to deduct various business expenses from your gross income. While it can be a way to lower your tax bill, it also can impact your Social Security taxes and future retirement benefits.
The impact of tax deductions
For example, if your gross income is $100,000 and you have $20,000 in deductible business expenses, your net income is $80,000. That means your Social Security tax is calculated based on the $80,000 figure instead of the full $100,000.
Remember, your
How Social Security credits work for self-employed people
In 2024, you earn one credit for every $1,730 you earn during the year, up to a maximum of four credits per year. To qualify for retirement benefits, you generally need 40 credits, roughly 10 years of work. Your 1099 income, which is your gross earnings before deductions, helps calculate these credits. It's important to understand that your 1099 income affects Social Security benefits.
Self-employed people know that sometimes income isn't as consistent as it usually is for traditional employees. Social Security uses your 35 highest-earning years,
So a few years of lower income may not drastically impact your potential Social Security income if you have higher earnings in later years. However, having consistently high earnings can help maximize your future Social Security benefits. For example, if you had a few lean years early in your business, you can replace those in the calculation by working a few additional years at a higher income.
What's the difference between W-9 and 1099 forms?
When you're self-employed, it's crucial to understand the difference between
- Form W-9. With this form, you give businesses your tax identification number and other pertinent information so they can report your earnings on Form 1099-NEC.
- Form 1099-NEC. Each year, businesses must issue a 1099-NEC to any independent contractors that were paid non-employee compensation of $600 or more in the year. This provides you with the total amount of your earnings from any businesses you worked for so you can calculate your self-employment taxes and accumulate Social Security credits.
Retirement planning for the self-employed
Planning for a comfortable retirement requires a proactive approach. Social Security, while vital, is just one piece of the puzzle. Building a diversified retirement portfolio that complements your Social Security can help you meet your retirement goals.
How Social Security fits with other investments
Social Security provides a guaranteed source of income in retirement that you can rely on, regardless of market fluctuations. It's designed to replace about
Because Social Security alone may not be enough to support your needs, there are other
- Individual retirement accounts.
IRAs are tax-advantaged accounts that allow you to contribute pre- or after-tax dollars to a range of investment options. - Solo 401(k) plans. A
solo 401(k) lets you contribute a portion of your self-employment income toward retirement savings. - Simplified employee pension (SEP) IRAs. A
SEP IRA is another tax-advantagedretirement savings option for self-employed people and small business owners. It offers higher contribution amounts than traditional or Roth IRAs. - Annuities.
Annuities may provide guaranteed income in retirement, helping supplement your Social Security benefits with another predictable source of funds. - Other income sources. Other options to
complement retirement income include rental properties, part-time work or personal investments.
If you're looking for more tools and information to help self-employed business owners navigate taxes, consider reviewing these resources from the IRS:
Forms and associated taxes for independent contractors .Self-employment tax information (including Social Security and Medicare taxes) .Social Security when you are self-employed .
Your path to a more secure retirement
Understanding how Social Security works for self-employed people—including how you pay in and how deductions might affect your future benefits—is one important step toward planning your retirement income and securing your financial future.
Being self-employed doesn't mean you have to go it alone. Reach out to a