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Paying Medicare Payroll Taxes

Independent contractors pay twice as much in payroll taxes as employees.

Q. I’m 60 and my employer recently quit taking Medicare and Social Security out of my wages. Should this be happening? Don’t I need to pay these taxes for my later years?

A. No, this shouldn’t be happening—and you do need to pay these taxes to protect your rights to Social Security retirement benefits and Medicare when you’re older. But your situation is not uncommon, according to the Internal Revenue Service.

“Sometimes employers stop withholding tax from employees’ wages under the mistaken notion that they can choose to treat employees as independent contractors,” IRS officials say. “Employee misclassification is a serious problem that can result in an assessment of tax, penalties, and interest against the business.”

The IRS says that an employee who believes he or she is being incorrectly treated as an independent contractor should file Form SS-8 (“Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding”). An employer can also file this form to clarify how a worker should be classified. Form SS8 is available online, together with help on how to fill it out.

Whether you count as an employee or an independent contractor makes a big difference in the amount you pay in payroll taxes. In 2009:

  • As an employee, you pay taxes of 6.20 percent on applicable earnings for Social Security, and 1.45 percent on all earnings for Medicare (a combined rate of 7.65 percent), and your employer pays the same amount.
  • As an independent contractor, you pay the self-employed combined rate of 15.30 percent—your contribution plus the amount an employer would otherwise pay.

Patricia Barry is a senior editor at the AARP Bulletin.

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