Self-Employed: Why They Pay More in Social Security Taxes
Self-employed individuals and small business owners often find themselves paying more into the Social Security program compared to traditional employees. This is due to a simple reason and several factors that contribute to the higher tax burden.
The Reason for Higher Self-Employed Taxes
Traditional employees have their Social Security and Medicare taxes withheld by their employers, resulting in a combined tax rate of 7.65%. This includes a 6.2% contribution for Social Security and 1.45% for Medicare. Employers match these contributions. However, self-employed individuals do not have an employer to share this burden and must cover the full 15.3% (7.65% for both programs) out of their earnings.
Limited Tax Deductions
Self-employed individuals can deduct half of their Social Security and Medicare taxes from their taxable income. While this deduction helps offset the increased tax liability, it does not fully eliminate the higher contribution they are responsible for.
Consider All Added Costs
Running a business as a self-employed individual comes with additional financial responsibilities. In addition to higher Social Security taxes, they may need to make quarterly estimated tax payments to the IRS, save for retirement without employer contributions, and secure their own health insurance.
Incorporate Costs into Business Planning
When starting a business, it is crucial to consider these added expenses, including taxes, retirement savings, and insurance costs. Adequate research and planning are essential for ensuring financial stability when self-employed.
Overall, self-employed individuals pay more in Social Security taxes due to the lack of an employer to share the burden and the limited tax deductions available. It is important for them to carefully factor in these additional costs when planning and managing their businesses. By doing so, they can ensure financial stability and meet their obligations to the Social Security program.
