Freelance and Social Security
Thankfully, there’s one benefit you won’t have to relinquish if you pursue a freelance career: Social Security. Freelancers have the same access to Social Security as salaried employees and are eligible provided they rack up enough lifetime credits (40 credits). Former freelance workers can begin collecting those benefits between age 62 and 70 when eligible.
- Self-employed workers must pay both the employee and employer portions of Social Security taxes.
- Structuring your freelance work to avoid self-employment tax helps to keep more money in your pocket for the given year, but it will also reduce the size of your Social Security benefit payment in retirement years so keep this in mind when planning and filing your taxes.
- The amount of money you will receive from your Social Security benefit payment is calculated based on your 35 highest-earning years.
*source – https://www.investopedia.com/articles/personal-finance/030216/social-security-selfemployed-how-it-works.asp
Comparing self-employed vs. working for an employer
- If you work for an employer, you and your employer each pay a 6.2 percent Social Security tax on up to $137,700
of your earnings and a 1.45 percent Medicare tax on all earnings.
- If you’re self-employed, you pay the combined employee and employer amount, which is a 12.4 percent Social Security tax on up to $137,700 (for 2020, this number increases in 2021 to $142,800) of your net earnings
Calculating your tax rate (information provided by ssa.gov)
IRS Schedule SE: Self-Employment Tax is where you report your business’ net profit or loss as calculated on Schedule C. The federal government uses this information to calculate the Social Security benefits you’ll be entitled to later on down the road. Self-employment tax consists of both the employee and employer portion of Social Security (6.2% + 6.2% = 12.4%) and the employee and employer portion of Medicare (1.45% + 1.45% = 2.9%), which makes the total self-employment tax rate 15.3%.
Yikes… It may seem like you’re getting the short end of the stick because you have to pay both the employee and the employer portion of the tax, but that isn’t necessarily true.
Self-employed tax deductions
If you are self-employed how much you pay in Social Security taxes is based on your net income. On Schedule SE, you multiply your business’ net profits or losses as calculated on Schedule C by 92.35% before you calculate how much self-employment taxes you owe.
For example, if your Schedule C profit was $100,000, you would only pay the 12.4% combined employee and employer portion of Social Security tax on $92,350. Instead of paying $12,400, you’d pay $11,451.40. This tax deduction would save you $948.60. Half of $11,451.40 is $5,725.70, which is the employer’s matching portion of the Social Security tax and this amount is considered a business expense and reduces your taxable earnings from self employment. This business expense would reduce your taxable earnings to $94,274.30, which you would enter for adjusted gross income. Your total amount of self-employment tax, $11,451.40, is reported as additional taxes. Of course, you still have to pay regular income tax on your profit.
* The CARES (Coronavirus Aid, Relief, and Economic Security) Act allows employers to defer employee Social Security taxes through Dec. 31, 2020—50% of the deferred amount will be due Dec. 31, 2021, and the other half by Dec. 31, 2022. This applies to the self-employed as well. (sourced from Investopedia.com)
However, you can deduct half of your Social Security tax on your IRS Form 1040, but the deduction must be taken from your gross income in determining your adjusted gross income. It cannot be an itemized deduction and must not be listed on your Schedule C.
First, your net earnings from self-employment are reduced by half the amount of your total Social Security tax. This is similar to the way employees are treated under the tax laws, because the employer’s share of the Social Security tax is not considered wages to the employee.
You must have worked and paid Social Security taxes for a certain length of time to get Social Security benefits. The amount of time you need to work depends on your date
of birth, but no one needs more than 10 years of work. You need to have accumulated 40 credits.
In 2020, if your net earnings are $5,640 or more, you earn the yearly maximum of four credits — one credit for each $1,410 of earnings during the year. If your net earnings are less than $5,640, you still may earn credit by using the optional method described later in this fact sheet.
All your earnings covered by Social Security are used to figure your Social Security benefit, so, report all earnings up to the maximum, as required by law.
Figuring your net earnings
Net earnings for Social Security are your gross earnings from your trade or business, minus your allowable business deductions and depreciation.
Some income doesn’t count for Social Security and shouldn’t be included in figuring your net earnings; this includes any of the following:
- Dividends from shares of stock and interest on bonds, unless you receive them as a dealer in stocks and securities.
- Interest from loans, unless your business is lending money.
- Rentals from real estate, unless you’re a real estate dealer or regularly provide services mostly for the convenience of the occupant.
- Income received from a limited partnership.
The bottom line is that you should max out your Social Security (don’t underfund it). The media talks about Social Security and how it might not be there, but we don’t believe this will be the case. We believe it will be a significant benefit and will be there when you retire. Social Security is one of the integral pieces of your retirement and will be of great benefit to you as a Freelancer. Make sure you talk to your CPA or tax advisor about your long-term goal to maximise social security benefits.
Contacting Social Security
The most convenient way to contact Social Security is to visit www.socialsecurity.gov. There are several things you can do online: apply for benefits; get useful information; find publications; and get answers to frequently asked questions.
When you open a my Social Security account, you have more capabilities. You can review your Social Security Statement, verify your earnings, and print a benefit verification letter. You can also change your direct deposit information, request a replacement Medicare card, request a replacement Social Security card (if you have no changes and your state participates), and get a replacement SSA-1099/1042S.
You can also Call them toll-free at 1-800-772-1213 or at our TTY number, 1-800-325-0778, if you’re deaf or hard of hearing.
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