If you are working senior who is self-employed and also receiving Social Security benefits, your benefits may increase or decrease. Working during retirement also means you must continue to pay Social Security and Medicare taxes on your work income.
This article looks at how working for yourself affects your Social Security benefits and how to factor this situation into your retirement planning.
- Working and receiving Social Security benefits can increase your credits if your self-employment income is high enough.
- Your Social Security credits can be limited if you work and receive benefits before your full retirement age.
- Self-employed seniors must also pay self-employment taxes on their business income in addition to income taxes.
- Your self-employment income and self-employment tax are added to your other income on Form 1040 or Form 1040-SR if you are 65 or over.
Who Is Self-Employed?
The Internal Revenue Service (IRS) says someone is self-employed if they meet at least one of these criteria:
- Carrying on a trade or business as a sole proprietor (a solo business owner) or an independent contractor (rather than an employee)
- Member of a partnership that carries on a trade or business
- Otherwise in business for yourself (including a part-time business)
Being self-employed also includes people who own other types of business, like a limited liability company (LLC). You're not considered self-employed, however, if you are the owner of a corporation or S corporation because these people are stockholders.
For the purposes of this article, we will consider someone self-employed if the individual owns a business, has business income and expenses, and is filing a business tax return.
Income Tax for Self-Employed Seniors
If you have self-employment income, you must report it to the IRS and pay taxes on it. That includes income from products you sell and services you provide to clients or customers. One common type of income for solo business owners is from a 1099 form, usually Form 1099-NEC, which reports income for providing services.
Your self-employment income is added to your personal tax return along with other income including any Social Security benefit income you may receive. The net income from your business is calculated on Schedule C of this form.
Your net income from self-employment, for Social Security purposes, is your gross earnings minus allowable business deductions and depreciation. Your self-employment earnings don't include:
- Dividends from investments
- Interest from loans
- Real estate rentals, unless you are a real estate dealer
- Income from a limited partnership
There is a special version of Form 1040 for seniors over age 65, called Form 1040-SR. If you are filing your taxes using tax preparation software, you will automatically file using this form if you are over 65. Be sure to check that the version you are using includes Schedule C.
Working and Receiving Social Security
You may continue to work in your business and still collect Social Security benefits. This income affects your retirement benefits in several ways.
It could result in a higher benefit for you. The Social Security Administration (SSA) recalculates your benefits each year, and each year your self-employment income is included in the calculation. If this income is higher than previous years' income, it could result in a higher benefit amount for the year.
Your work income may also reduce your benefit if you are younger than the full retirement age when you retire and you earn more than the yearly earnings limit. If you are under full retirement age for a particular year, your benefit payments are reduced by $1 for every $2 you earn over the limit.
Beginning with the month you reach normal retirement age (age 66, if you were born between 1943 and 1954), you can earn as much as you want and not have to pay back any Social Security benefits you receive.
Check with your local Social Security office for more questions about how your self-employment may affect your future Social Security benefits.
Even though you may be receiving Social Security benefits, if you are self-employed, you must still pay Social Security and Medicare taxes, called self-employment taxes on your self-employment income. If you have $400 or more in self-employment earnings, you must also report those earnings on your tax return.
The most important thing to remember about self-employment taxes: This tax isn't deducted from your income as a business owner. You must calculate the self-employment tax you owe and pay this amount during the year. Many business owners pay estimated taxes quarterly to avoid penalties for underpayment.
If you don't have a profit for a year, you don't have to pay self-employment tax, but you also don't receive any Social Security credits for that year.
Calculating Self-Employment Tax
The current self-employment tax rate is 15.3%. The Social Security part is 12.4% up to a Social Security maximum (this rate changes every year). The Medicare rate is 2.9% with no maximum. In addition, if your total income for the year from all sources is more than $200,000, you must pay an additional 0.9% of Medicare tax for that year.
You can take a deduction of half of your total Social Security tax on Schedule SE. This reduction is to bring self-employed individuals in line with the one-half of Social Security paid by employers for employees.
If you have income from both self-employment and work as an employee, your employment income is counted first if the combined amount is more than the Social Security maximum.
Frequently Asked Questions (FAQs)
How do you pay Social Security and Medicare taxes for self-employed income?
Seniors must pay self-employment taxes for Social Security and Medicare each year based on the net income from their businesses. You'll need to complete Schedule SE to calculate the amount of the tax and include it with your other information on your personal tax return (Form 1040 or Form 1040-SR for seniors). It becomes part of your total taxable income for the year.
If you don't have enough withheld from other income, you'll need to make quarterly estimated tax payments to avoid underpayment penalties.
How much self-employed income can you earn before needing to pay Social Security taxes?
If you earn $400 or more during the year from your business, you must file Schedule SE and pay self-employment taxes. If your business net income is less than $400 or you have a loss for the year, you don't have to pay these taxes, but you also don't receive Social Security benefits for that year.
What's the annual maximum Social Security tax on self-employed individuals?
The annual maximum amount of Social Security tax changes each year. Both your income as an employee and income from your self-employment is counted to get to this amount. Employment income is counted first. For example, the Social Security maximum of 2021 is $142,800. If you have $100,000 of income from employment and $54,000 from self-employment, only $11,200 of your self-employment is counted.