Do You Have to Pay Social Security Tax if You're Self-employed?

When you’re an employee, Social Security tax is simple. It’s taken out of each of your paychecks automatically, without you having to do anything. 

But things get more complicated for those who are self-employed. Anyone who owns their own business, works as an independent contractor or earns money working side gigs knows that self-employment tax deductions can be tricky to calculate, and part of that is knowing how to calculate self-employment tax. 

Among the elements of self-employment tax to learn about are Social Security tax for self-employed people – and yes, you have to pay into Social Security if you’re self-employed. 

Knowing what to do at tax time is a matter of carefully following tax laws and getting help from a tax professional. But as you prepare for tax season, we’ve gathered some considerations for self-employment tax filers to keep in mind. 

Am I Self-Employed?

The IRS classifies you as “self-employed” if you run a trade or business alone or under a partnership or work as an independent contractor. Additionally, anyone who is in business for themselves, even on a part-time basis or through gig work (such as freelance jobs), is typically classified as “self-employed.”

Currently, according to the IRS, if you’re self-employed and make more than $400 a year, you pay Social Security taxes as well as Medicare taxes when you file your income taxes. Together, both of those taxes are referred to as the “self-employment tax,” and you pay them in addition to your income taxes. You should consult with your tax professional in order to determine which forms are right for you to file based on your specific tax situation, but know that self-employed filers have to fill out more paperwork than those who are filing as employees of a company.

How Much Self-Employment Social Security Tax Will I Pay?

If you’re an employee, you pay a set percentage of your salary in Social Security tax, with an additional percentage for Medicare tax on your entire earnings. Then your employer pays in an equal amount of each. 

But being self-employed means you’re the employee and employer, so you pay the entirety of both shares. That means you end up paying a higher share of taxes: the employee’s percentage and the employer’s taxes. That’s why it’s wise to set aside extra money for taxes if you’re self-employed. Consult your tax professional or financial advisor for guidance.

Do Self-Employed People Get Tax Breaks?

Yes! Luckily, there are a few deductions that can help reduce your tax bill and lessen the burden of that Social Security tax. 

The first is the ability to reduce your net earnings by the employer’s portion of the Social Security and Medicare tax. If the employer’s portion of the Social Security and Medicare tax is presently 7.65%, and you made $50,000 in net earnings, you only have to pay self-employment taxes on $46,175 of that amount ($50,000 X 92.35%). After that, you can multiply that number by the combined Social Security and Medicare tax rate, which means your overall total self-employment tax will be lower. Consult your tax professional for the current rates and to make sure you’re calculating rates properly.

You can also deduct the employer’s share of the self-employment tax from your income, since the IRS sees that tax as a business expense. That number will go in the adjusted gross income section of your Form 1040 under “Deductible part of self-employment tax.”

Yes, if you’re self-employed, you’re still paying more tax than someone who is filing as an employee of a company. But those two deductions, along with other deductions for business expenses that your tax professional may be able to help you identify, can help mitigate the extra expense.

Remember that you don’t pay the self-employment tax on every cent you bring in, only on the actual profits. That’s why it’s a good idea to keep a detailed record of any business expenses: They reduce your net income. 

Make Sure You Are Covered

Taxes can be tricky. But commercial insurance doesn’t have to be. Reach out to Farm Bureau for help navigating the best way to cover your business!