It can be hard to understand every element of Social Security Income (SSI), especially if you are self-employed.
Here's a clear and concise guide to help you understand the process of qualifying for SSI and ensuring accurate reporting of your earnings.
SSI Payments for Self-Employed Individuals
The majority of individuals who contribute to Social Security are employed by a company. The employer deducts Social Security taxes from the paycheck, matches the contribution, sends taxes to the Internal Revenue Service (IRS), as well as reports wages to Social Security.
Yet, self-employed individuals are responsible for managing this process on their own. If you run a trade, business, or profession, either independently or as a partner, you are classified as self-employed. It is necessary to submit your earnings and fulfill your tax obligations directly to the IRS.
If your net earnings exceed $400 in a year, it is necessary to include them on Schedule SE, along with other mandatory tax forms. As a self-employed individual, you have the dual role of being both the employee and the employer when it comes to Social Security.
This means that you are responsible for withholding 12.4% in Social Security taxes from your earnings. Both the employer's and your own portion of Social Security (6.2%) must be contributed, according to Investopedia.
This is commonly known as the self-employment tax. Additionally, your Medicare taxes are included under the Federal Insurance Contributions Act (FICA).
If you're self-employed as well as your net earnings are $400 or less, you won't be required to pay Social Security taxes.
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Social Security, Medicare Taxes Responsibilities
Both employees and employers are required to contribute to Social Security and Medicare taxes. The Social Security tax rate is 6.2% on earnings up to $168,600, while the Medicare tax rate is 1.45% on all earnings.
For self-employed individuals, it is important to note that you are responsible for paying both the employee and employer share of taxes. This includes a 12.4% Social Security tax on up to $168,600 of your net earnings, as well as a 2.9% Medicare tax on your entire net earnings.
According to Marca, if your salary exceeds $200,000 ($250,000 for married people filing jointly), an additional 0.9% Medicare tax will be owed.
There are two ways to lower your taxable income. Firstly, you can reduce your net earnings from self-employment by half of your total Social Security tax. You have the option to deduct half of your Social Security tax on IRS Form 1040.
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