Social security tax is a non-issue for salaried employees.
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In exchange for some guy named FICA taking a chunk of your wages every pay period, you receive social security benefits when you retire – subject to the Social Security Administration's benefit guidelines, of course.
In a salaried or hourly employee scenario, the employee's FICA contribution is matched by the employer. But what happens when you are your own employer? Can self-employed individuals even get social security?
Yes, they can. In fact, if you are self-employed you must participate in the social security system whether you like it or not. The only difference is that instead of receiving an employer's FICA contribution, you're responsible for the full shot. It's not as simple as it sounds . . . Here are some of the things self-employed workers need to know about their participation in the Social Security program.
Self-employed workers participate in social security by paying what is known as "self-employment tax". As the name suggests, self-employment tax covers social security and Medicare tax (or FICA contribution) for people who earn their living from self-employment. The self-employment tax rate is 15.3%, which includes both the employee and employer portions.
The payment of self-employment tax is not optional and you cannot choose not to participate in the social security program. Since enrollment is mandatory, self-employment tax is a required tax payment. Failure to pay this tax will result in the same kinds of fines and penalties that apply to the nonpayment of ordinary income taxes.
Self-Employment Tax Limits
As a self-employed worker, only the first $106,800 of your combined wages, tips, and net earnings is subject to the social security portion of the tax, which represents 12.4% of the total self-employment tax. However, the 2.9% Medicare portion of the self-employment tax continues to apply, regardless of the amount of income you earn from self-employment activities.
SE Tax Deduction
In an effort to minimize the financial impact of paying both the employer and employee portion of social security and Medicare taxes, self-employed workers should remember to take the SE tax deduction. This rule allows you to deduct half of your SE tax to calculate your adjusted gross income on the first page of Form 1040.