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Self-Employment and Social Security

See how going into business for yourself affects your benefits

Woman working on her laptop at home office, Self-Employment and Social Security

Lucia Lambriex/Getty Images

An estimated 10 million Americans are self-employed.

Q. I'm planning to leave my staff job at a magazine and open up my own writing and editing business. When I become self-employed, what will I need to know about paying Social Security and Medicare taxes?

A. As you'll soon see, you'll have to learn quite a lot about running a business, keeping track of your revenue, profits or losses, and paying your taxes when they're due. It's going to be a handful, but you won't be alone. An estimated 10 million Americans hold self-employment jobs, according to a 2014 report from CareerBuilder. Self-employed folks had jobs in management, landscaping, housekeeping, construction, personal care and Web development, among other fields.

In your current job, your employer withholds a 6.2 percent Social Security tax on up to $118,500 of your earnings. The employer then matches that amount with another 6.2 percent and sends the combined sum to the Internal Revenue Service. For Medicare, your employer deducts a 1.45 percent tax from all your earnings (there's no ceiling) and matches it.

Once you become self-employed, you'll have to pay both the employer and employee shares of Social Security taxes on your earnings — a total of 12.4 percent of your covered earnings in 2015. You'll also pay a total of 2.9 percent Medicare tax on all your earnings.

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And, if you earn more than $200,000 — or $250,000 for a married couple filing jointly — you must pay another 0.9 percent in Medicare taxes.

Q. Is it fair to make a self-employed person pay a double Social Security and Medicare tax?

A. It doesn't exactly feel fair, but the logic is that you are now both the employer and the employee and must cough up for both sides to help keep the Social Security system funded. Still, you can make some of it back, because you can deduct the extra Social Security and Medicare taxes on your income taxes.

Q. How do I actually pay the self-employment taxes?

A. You pay as part of your regular filing of a 1040 income tax form. You'll generally need to fill out Schedule C (profit or loss from business) and Schedule SE (self-employment tax). These can be pretty complicated, but income tax software programs will fill out these forms automatically after you enter the specific numbers of your self-employment.

Q. Do I have to pay self-employment taxes on every cent that I take in?

A. No, just on your net earnings, which is to say the money you get paid minus expenses. For instance, if your writing business requires that you travel to gather information, the cost of that travel might be subtractable from your income.

And keep in mind that in this column we're talking only of Social Security and Medicare taxes. Self-employment also generates liability for income taxes, and there's a separate set of rules for them.

Q. Will I earn the same work credits that are counted toward Social Security retirement and other benefits?

A. Yes. In 2015, self-employed workers, like their corporate-employed counterparts, earn one work credit for every $1,220 of earnings. A worker who earns $4,880 gets four work credits, the maximum that can be earned in one year. Generally speaking, most workers need 10 years of work, or 40 credits, to qualify for Social Security benefits.

Q. Who does Social Security consider self-employed?

A. There are several measures. But primarily, if you're in business for yourself and have net earnings of more than $400 a year, you can be considered self-employed.

But there's also another dimension: You must be engaged in what Social Security calls a "trade or business."

You said you plan to open a writing and editing business. So, the question is: Will that constitute "a trade or business"? Social Security answers the question by citing two examples. In the first case, an author writes a book in his spare time but has nothing to do with the book afterward. That, Social Security says, would not constitute a "trade or business," in that it's a one-time thing. However, a writer who writes a book, prepares new editions and delivers lectures about the book would be considered to be engaged in a writing or editing trade or business.

See also: Social Security Question and Answer Tool

Q. Are self-employed people allowed to form partnerships with family or friends?

A. Yes. Social Security defines a partnership as a tie-in "created when two or more persons join together to carry on a trade or business. Each partner contributes in one or more ways with money, property, labor or skill and shares in the profits and risks of loss in accordance with the partnership agreement or understanding."

Any net income that you had from the partnership would affect your liability for self-employment taxes.

Q. Where can I find out more about taxes on the self-employed?

A. Start with a pamphlet called "If You Are Self-Employed." Searching "self-employment" on the Social Security Administration's website will provide a lot of information.

Stan Hinden, a former columnist for the Washington Post, wrote How to Retire Happy: The 12 Most Important Decisions You Must Make Before You Retire. Have a question? Check out the Social Security Mailbox archive. If you don't find your answer there, send an email to the Social Security Mailbox.

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