Social Security — If You're Self-Employed
The majority of people who pay into Social
Security work for someone else. Their employer deducts Social Security taxes from their
paycheck, matches that contribution and sends wage reports and taxes to the Internal
Revenue Service (IRS) and Social Security. But self-employed people must report their
earnings and pay the taxes directly to the IRS. This document explains that process.
You are self-employed if you operate a trade, business or profession, either by
yourself or as a partner. You report your earnings for Social Security when you file your
federal income tax return. If your net earnings are $400 or more in a year, you must
report your earnings on schedule SE for Social Security purposes, in addition to the other
tax forms you must file.
Paying Social Security And Medicare
Taxes
The Social Security tax rate for 1999 is 15.3 percent (the same as 1998) on
self-employment income up to $72,600. If your net earnings exceed $72,600, you continue to
pay only the Medicare portion of the Social Security tax, which is 2.9 percent, on the
rest of your earnings. There are two income tax deductions that reduce your tax liability.
The deductions are intended to make sure self-employed people are treated in much the same
way as employers and employees for Social Security and income tax purposes.
First, your net earnings from self-employment are reduced by an amount equal to half of
your total Social Security tax. This is similar to the way employees are treated under the
tax laws in that the employer's share of the Social Security tax is not considered income
to the employee.
Second, you can deduct half of your Social Security tax on the face of the IRS Form
1040 (line 25). This means the deduction is taken from your gross income in determining
adjusted gross income. It cannot be an itemized deduction and must not be listed on your
Schedule C.
If you have wages as well as self-employment earnings, the tax on your wages is paid
first. But this rule is important only if your total earnings are more than $72,600. For
example, if you have $20,000 in wages and $30,000 in self-employment income in 1999, you
pay the appropriate Social Security taxes on both your wages and business earnings.
However, if your 1999 wages are $75,000 and you have $10,000 in net earnings from a
business, you do not pay dual Social Security taxes on earnings above $72,600. Your
employer will withhold 7.65 percent in Social Security taxes up to $72,600 and 1.45
percent (the Medicare portion of an employee's tax rate) on earnings between $72,600 and
$75,000. And you must pay the 2.9 percent Medicare self-employment tax (not the full
Social Security tax) on your $10,000 in self-employment earnings.
Earnings Credits
You need earnings credits to qualify for Social Security benefits. The number of
credits you need depends on your date of birth, but no one needs more than 40. You can
earn up to four credits per year.
If your net earnings are $2,960 or more, you earn four credits--one for each $740 of
earnings. (If your net earnings are less than $740, you still may earn one or more credits
by using the optional method described later in this document.)
All of your earnings covered by Social Security are used in figuring the amount of your
Social Security benefit. So, it's important that you report all of your 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 all of your allowable business deductions and depreciation.
Some income doesn't count for Social Security. Don't include the following in figuring
your net earnings:
- 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 are a real estate dealer or regularly provide
services mostly for the convenience of the occupant; or
- income received from a limited partnership.
Optional Method
If your actual net earnings are less than $400, your earnings can still count for
Social Security under an optional method of reporting. The optional method can be used if
your gross earnings are $600 or more or when your profit is less than $1,600.
You can use the optional method no more than five times. Your actual net
must have been $400 or more in at least two of the last three years, and your net earnings
must be less than two-thirds of your gross income.
Here's how it works:
- if your gross income from self-employment is between $600 and $2,400, you may report
two-thirds of your gross or your actual net earnings if $400 or more; or
- if your gross income is $2,400 or more and the actual net earnings are $1,600 or less,
you report either $1,600 or your actual net.
Special Note For Farmers: If you're a farmer, you can use the optional reporting
method every year. It's not necessary to have had actual net earnings of at least $400 in
a preceding year. We suggest you call Social Security and ask for the booklet, A Guide for Farmers, Growers, and Crew Leaders (Publication No.
05-10025), for information on how to report your earnings.
How To Report Earnings
You must complete the following federal tax forms by April 15
following any year in which you have net earnings of $400 or more:
- Form 1040 (U.S. Individual Income Tax Return);
- Schedule C (Profit or Loss from Business) or Schedule F (Profit or Loss from
Farming) as appropriate; and
- Schedule SE (Self-Employment Tax).
These forms can be obtained from the IRS and most banks and post offices.
Send the tax return and schedules along with your self-employment tax to the IRS.
Even if you don't owe any income tax, you must complete Form 1040 and Schedule SE to
pay self-employment Social Security tax. This is true even if you already get Social
Security benefits.
Church Workers
If you are considered self-employed because of your work for a church or
church-controlled organization, you must report earnings of $100 or more. For more
information, ask Social Security for the factsheet,If You Work
For A Nonprofit Organization (Publication No. 05-10027).
Family Business Arrangements
Family members may operate a business together. A husband and a wife may be
partners or running a joint venture. If you operate a business together as partners, you
should each report your share of the business profits as net earnings on separate
schedules, even if you file a joint income tax return. The amount each of you should
report depends upon your agreement.
Social Security's
Toll-Free Number
1-800-772-1213
Call 24 hours a day,
including weekends and holidays.
To speak to a representative,
call between 7 a.m.and 7 p.m.
any business day. |
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