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Self Employment and Social Security: How Does It Work?
Small Business

Self Employment and Social Security: How Does It Work?

Next Insurance Staff
By Next Insurance Staff
Apr 3, 2019
5 min read

Being self-employed comes with its own unique set of mandatory tasks. Among those responsibilities is paying into social security, just as employees that work for a company pay.

There is also Medicare. The government collects both self-employment and Medicare taxes from your annual earnings when you file a federal income tax return.

Beyond some minor bureaucracy, understanding what taxes you should and shouldn't pay is quite straightforward. In the below blog post, we trek through the ins and outs of everything from social security tax contribution rates to how to calculate your earnings.

Claiming unemployment while self-employed

According to the Balance, self-employed individuals do not pay unemployment tax, nor can they collect unemployment benefits if they become unemployed. First, we need to review Social Security contribution rates. Let's review some basic math, which will allow you to better understand how much you'll pay in Social Security and Medicare taxes.

The two taxes are typically collected from employees as well as employers and split evenly. The process is the same for Medicare, and in total, you pay 15.3 percent in taxes for freelancers.

Here's a quick break down:

Social Security: 12.4 percent (both the employee and employer pay tax). In this case, self-employed workers must pay taxes twice.
Medicare: 2.9 percent (again, freelancers pay both portions).

The great news about these is that you can deduct half of your self-employment tax payments from business earnings. Whenever you hear the term FICA (Federal Insurance Contributions Act taxes) this is what it's referring to. In the United States, social security is a safety net for the retired, unemployed, or disabled. Medicare kicks in when you turn 65, but is available at the age of 62.

Requirements for collecting social security

Each year you pay into Social Security, you earn ‘credits.’ The maximum number of credits you can earn in a year is four.

These credits enable you to reap the benefits of social security when the time comes. There are a number of factors that go into the vetting process of who and who does not receive these benefits, including age and overall earnings.

The Social Security Administration's website says “In 2018, a worker must earn $1,320 to earn one work credit. In order to qualify for Social Security Disability benefits, you will generally need to have earned a total of 20 work credits, although there are age exceptions to this rule.”

Self employed social security payments

Calculating net earnings

As a freelancer, it's a great best practice to keep track of all monthly, annual and other earnings. Keeping this information organized will come in handy when tax time rolls around. Doing things like hiring an accountant, finding a system to digitize and organize your files for expenses, invoices and more is also highly recommended.

If you're asking yourself why go through all of the trouble of being so organized? The answer is plain and simple: it'll eliminate the unnecessary headache you get at tax time. As a result, you never have to sort through endless receipts and documents just to calculate your net earnings.

Net earnings can be easily calculated by subtracting business-related expenses from the total amount of money you made for the year. Some common things that count as business expenses include:

  • Office space
  • Internet and phone service
  • Donations to charity
  • Interest from loans

You can deduct nearly any reasonable expense.

How to make a social security payment while unemployed

Since self-employed workers do not qualify for unemployment benefits, the question that often arises is: Do I have to still have to pay into social security? The answer is a bit grey, and it depends on how much you make in a year.

If you are not working and receive little income, you do not pay social security tax. In the event that you work but only make enough to get by, you may also be exempt from this tax.

How to contact social security

If you have further inquiries, you can reach out to the Social Security Administration office in one of two ways.

Give them a call: SSA office has an automated system available 24/7, at 1-800-722-1213. Workers can even chat live with customer service representatives from 7 am until 7 pm EST.

Visit the website at where you can:

  • Access important account information
  • Print benefit verification forms
  • Update direct deposit info
  • View statements
  • Verify earnings

Know your benefits and tax responsibilities

As a small business owner, it's a good idea to be familiar with social security and self-employment tax responsibilities. It's also important to stay current with the most up-to-date requirements. Also, using services like automatic accounting software, or hiring an actual accountant can result in a more well-oiled operation. This will make tax time seem like a walk on the beach.

You should also find a filing system that works best for you and one that others find it easy to understand, as well.

If your business has a physical location or if you provide a service, having general liability insurance is highly recommended to protect against accidents that could cause your business to lose money.

Next Insurance Staff
By Next Insurance Staff

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