Self-Employment Social Security Taxes
Social Security tax applies to employers, employees, and self-employed individuals -- those who work for themselves. An employee pays his share of Social Security tax via payroll withholding, which requires the employer to take it out of his wages. A self-employed individual makes payments directly to the Internal Revenue Service.
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Significance
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The Federal Insurance Contributions Act governs the collection of Social Security tax. The tax an employee, employer and self-employed individual pay are put into a trust fund and used to pay benefits to qualified individuals. Retirees, the disabled, dependents of beneficiaries and survivors of deceased employees are eligible for Social Security benefits.
Self-Employed Payees
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Self-employment tax includes Social Security tax and Medicare tax. A self-employed individual pays self-employment tax and files her annual tax return via Schedule SE if she has net earnings of $400 or more or church income of $108.28 or more as of 2011. Self-employment tax is applied to net income; an independent contractor or sole proprietor can use Schedule C or C-EZ to determine her net earnings. Social Security tax applies regardless of the individual's age or whether she's receiving Social Security benefits.
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Social Security Calculation
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In 2010, employees pay Social Security tax at 4.2 percent of gross income, up to $106,800 annually; employers pay 6.2 percent. Self-employed individuals do not have an employer to pick up the difference, and therefore, pay the entire 10.4 percent, up to $106,800 for the year. A self-employed person can deduct half of his Social Security taxes when determining his adjusted gross income, which the IRS uses to qualify him for certain tax benefits and results in a lower tax liability. Gross adjusted income is figured by calculating gross earnings, combining qualified earnings, such as business income and royalties, and deducting qualified deductions, such as half of self-employment tax and moving expenses.
Considerations
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A self-employed individual uses her Social Security number or individual taxpayer identification number to pay self-employment tax. Employers and employees each pay Medicare tax at 1.45 percent of all gross income. A self-employed individual does not have an employer to pick up the matching portion and pays the entire 2.9 percent.
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