If you work for yourself and are concerned about your future, Social Security for the self-employed is a subject you should understand. However, many folks don’t have a clear picture of how the process works, what can be expected at retirement and any other steps that need to be taken with regard to such financial matters. This is all information that is quite relevant and important to those who are their own boss. To learn how Social Security works for people who are self-employed, read on.
Social Security and Self Employment
When you work for someone else, Social Security and Medicare withholdings are automatically taken out of each paycheck. This isn’t the case when you’re both the employer and the employee. Therefore, the process is different. As a self-employed individual, you may not have a regular payday. In order to contribute your share toward Social Security, you will make a payment when you file your taxes each year. This payment will include both your determined tax payment, as well as the share that is typically required of traditional employers. The amount depends upon your earnings. In 2018, employees paid 6.2% of their income toward Social Security and 1.45% for Medicare withholdings. Employers match the total for the year.
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Schedule SE
When it comes to Social Security for the self-employed, there is a specific way to report income. It’s called Schedule SE, and it’s for sself-employmenttax. Net profit or loss of a business as it is calculated on Schedule C will be reported on this form. A person’s total self-employment tax is determined by adding together the employer and employee portions of Social Security and Medicare contributions. This is a total of 6.2% for employer plus 6.2% for employee Social Security contributions, along with Medicare payments of 1.45% plus 1.45% for both employee and employer portions. Thus, self-employed folks will owe 15.3% of their income to cover Social Security and Medicare when all is said and done.
Tax Deductions for the Self Employed
Taking business deductions when allowable is a good way to lower federal, state and local taxes owed each year by a self employed person. However, it’s important to keep in mind that this also lowers the amount paid into Social Security, which means that person would receive less of a monthly payout when they reach retirement age. It can be confusing as to whether one should take the deductions to save money now or defer the benefits until they retire. There are a lot of considerations to keep in mind when making a decision. Lower-earning business owners may wish to maximize current deductions in order to take advantage of Social Security calculation algorithms. In addition, if a person was a big earner earlier in their career and can rest upon those past Social Security contributions, taking maximum deductions might make sense. Some people feel it’s a safer move to save money now because the future of Social Security is uncertain. Investing in a private retirement fund is an option, as well.
This is a summary of how Social Security works for those who work for themselves. Social Security for the self-employed doesn’t have to be complicated.
