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Home > Social Security Tax For The Self-employed

The concept of the Social Security program is simple. If you are employed, you pay taxes into the system and when you retire or you become disabled you will receive monthly benefits based on your earnings. Most of the individuals who pay taxes to the Social Security have an employer. These employers withhold the taxes for the individual’s salary, match that contribution and send reports to the Social Security and Internal Revenue Service. The scenario is, however, different if you are self-employed. Self-employed individuals pay the taxes directly to the government. They report their contribution when they file their federal income tax return.

By definition, a self-employed individual is one who carry on a business as an independent contractor or as a sole proprietorship; one who is a member of a partnership that carries on a business and one who is otherwise in business for himself. There are tax advantages of being self- employed. Some of your personal expenses might be allowed as a business deduction and you don’t have to think about some tax costs that employees often worry about. However, self-employed individuals often get surprised by the amount of taxes they have to pay at the end year. This is because as a self-employed individual you pay two types of income taxes: the self-employed tax and the regular income tax.

Just as employees are entitled to benefits, self-employed individuals are also entitled to Medicare and Social Security benefits. They pay the Self-employment tax into the system. This tax is equivalent to the Federal Insurance Contributions Act (FICA) deducted from the salary of employees. Generally, you are required to pay taxes if you earned $400 or more. The maximum amount of net earnings from self-employment that is subject to tax in 2004 is $87,900. Generally, self-employed people are responsible for the entire amount of their social security and Medicare tax. Nevertheless, the federal income tax law allows these individuals to withheld one-half of their self-employment tax as an adjustment to their income subject to income tax.

Self-employment tax consists of two parts: 2.9% for Medicare and 12.4% for social security. Over-all self-employment tax is 15.3%. All of the tips, wages and net earning of at least $400 are subject to this tax. It is important to ensure your Social Security coverage when you are self-employed. You should report you earnings on Schedule SE to figure your self-employment tax. These schedule SE is filed with the federal income tax. Keep in mind that if you do not make sufficient payments by due dates you may be subject to a penalty for underpayment of taxes when you file your return.

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