Social Security Taxes While Self Employed
- When you work for an employer, you normally pay half of the Social Security payroll tax, while your employer pays the rest. But when you are self-employed, the IRS considers you to be both the employer and the employee. That means that you are responsible for paying both sides of the Social Security payroll tax. The employee/employer ratio for Social Security payroll tax was 6.2/6.2 percent of income, respectively, in 2010; if you are self-employed, however, you must pay the entire 12.4 percent of your income as a self-employed individual.
- Unlike many other taxes, the payroll tax that funds Social Security has an income limit; Social Security tax is only collected on income up to $106,800. If you have self-employment income above that level, you do not have to pay any further Social Security taxes on that income.
- The compromise tax bill passed by Congress at the end of 2010 and signed by President Obama included a 2 percent reduction in the Social Security payroll tax for the 2011 tax year to a total of 10.4 percent. The 2 percent reduction applies only to the employee side of the tax, bringing that tax down to 4.2 percent from its normal 6.2 percent level. As a self-employed individual, you are still required to pay 6.2 percent on the employer side, but the employee side drops down to 4.2 percent.
- If you are self-employed, you need to pay the IRS on your own, rather than having your employer withhold the taxes you owe and send them to the IRS. If you expect to owe at least $1,000, you may be required to pay your taxes on a quarterly basis, rather than waiting until you file your annual return on April 15. Your CPA or tax expert can help you determine whether or not these quarterly payments are necessary, and if so how much you need to pay each quarter.
