The Social Security Benefits of Self-Employment
Self-employment has numerous benefits, including freedom and being in charge. If you like responsibility, self-employment as a sole proprietor or in a partnership provides that as well. Responsibilities include tax matters and Social Security payments. You can accumulate Social Security benefits as a self-employed person and retire when you are retirement age.
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Establish Your Net Income
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File an Internal Revenue Service Schedule C if you are a sole proprietor, working for yourself, or if you are an independent contractor. This form works in conjunction with your IRS Form 1040 to allow you to claim expenses in running your business. Once you calculate your gross income and subtract the expenses, you have a net income figure to use for filing Schedule SE to report your net income to Social Security and pay taxes.
Social Security Provides Full Benefits to Self-Employed
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Self-employed persons have Social Security retirement benefits available as early as age 62 if you report your income and pay Social Security taxes known as Federal Insurance Contributions Act or FICA payments. Medicare payments are also required, and the IRS collects these taxes on Schedule SE. The tax rate in 2010 is 15.3 percent for the self-employed. This includes 6.2 percent for Social Security as employer and 6.2 percent as employee along with 1.45 percent for Medicare as an employer and 1.45 percent as employee.
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Benefits in Filing Federal Income Taxes
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As a self-employed worker, you are both employer and employee. You pay both parts of Social Security and Medicare taxes, but you can also take half of the tax payment off your IRS Form 1040. Subtract one-half the self-employment tax from gross income on Line 27 of Form 1040. You also get a reduction on Schedule SE for the amount you pay for yourself. See Schedule SE where you multiply by 92.35, allowing 7.65 percent or half your FICA taxes to not count as net income.
Social Security Credits Require a Minimum Income
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In order to receive four Social Security credits for a year to apply toward your retirement, your net income must be $4,480, or four times the $1,120 credit. You want to reach this number in order to receive four credits for the year to build your retirement, disability and survivors insurance benefits. If your fledgling business does not net $4,480 one year, you may want to use an optional method to pay FICA taxes. If your gross income is over $2,400 and your net earnings are less than $1,600, you can report $1,600. If your gross income is between $600 and $2,400, you can report two-thirds of your gross income. Maximum reportable amounts cannot exceed $4,480 under any optional methods.
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