For employees, Social Security taxes get taken out of their paycheck. But how does it work for self-employed people? Find out.

If you’re considering making the jump into self-employment or you’re already self-employed, chances are you’ve heard about self-employment taxes. This includes both the Social Security tax and Medicare tax.

Typically, most people pay this from their paychecks. Employers withhold the tax from an employee’s paycheck and deposit the money with the Treasury. This way, you never have to think about it.

If you’ve been working for a long time, you may even forget you pay Social Security taxes each paycheck. When you become self-employed, most people face a rude awakening. Social Security taxes for the self-employed are different from Social Security taxes for employees.

Here’s what you should know before leaping into self-employment. If you’ve already done so, this explains the new reality you’re facing.

Why self-employed people need to pay attention to Social Security

How Social Security Works For The Self-Employed - What is social security?

Initially, self-employed people weren’t covered by the Social Security system. That changed in 1950 when the Self-Employment Contributions Act (SECA) was passed. Today, self-employed people must contribute to Social Security, but they do so differently than employees.

Social Security taxes are paid by both the employee and the employer in a traditional W-2 job. Since a self-employed person is both the employee and employer, they have to pay double the Social Security tax that an employee directly pays.

As a self-employed person, there isn’t anyone to withhold the Social Security tax from your paycheck, either. That means you’re the one responsible for saving up for and paying your Social Security taxes throughout the year.

However, it’s important to note that Social Security isn’t a personal retirement account like a 401(k). Instead, the money you pay into Social Security today can get paid out to someone else. Then, when you retire, chances are someone else will be paying into Social Security when you receive benefits.

Overall, about 85% of the Social Security tax payments pay retired people. The other 15% goes toward helping disabled people and their families.

How much self-employed people pay in Social Security taxes

An employee pays 6.2% of their wages in Social Security taxes. Their employer pays another 6.2% of their wages. In total, this represents a 12.4% payment to Social Security. 

This tax applies until your wages exceed the Social Security wage base for the year. In 2021, that limit is $142,800. Once your wages exceed this limit, you stop paying Social Security taxes for the rest of the year.

Some employers combine this tax with the Medicare tax and label them FICA on your paystub. The Medicare tax is 1.45% of your wages with no wage base limit. Your employer has to pay the same 1.45% tax, as well. This makes your total employment taxes total 7.65% of your wages on each side.

Self-employed people get stuck with both the employee payment and the employer payment. This is because they’re both the employee and employer in the relationship. Rather than calculating the amount on your wages, which you may not have as a self-employed person, the calculation uses your net earnings from self-employment. The same $142,800 limit exists for self-employed people as it does for employees. 

Like with Social Security, you must pay both sides of the 1.45% Medicare tax on all of your net earnings. This, combined with both sides of the Social Security tax, equals 15.3% of your net earnings. Together, these are commonly referred to as the self-employment tax.

Thankfully, self-employed people do get a small break for paying both sides of self-employment taxes. They’re allowed to deduct one-half of their self-employment taxes paid as a business expense. It doesn’t change the amount of the payment for Social Security taxes, though.

How to save for your Social Security tax payments

Now you know you’re likely on the hook for paying 12.4% of your net earnings from self-employment in Social Security taxes. You’re responsible for another 2.9% of your net earnings from self-employment to pay Medicare taxes, too. It’s a good idea to start setting money aside to pay for those taxes. 

Novo is a good place to put your money. They’re an award-winning online bank for small businesses and self-employed people. They make it easy to run your business by connecting with several services you may use including Shopify, Stripe, Quickbooks, Slack, Xero, Zapier, and more.

Novo makes it easy to transfer money and make payments. Electronic transfers and mailing paper checks are both fee-free. You can deposit checks via their mobile app, as well. If you need help with your account, Novo even offers human-powered customer support.

How self-employed people pay Social Security taxes

Now that you have a system to save for the Social Security taxes you have to pay, how do you actually pay them? Ideally, you’ll pay your Social Security taxes as part of your quarterly estimated tax payments. You don’t have to label them separately from your federal income tax estimated payments. Instead, you combine them both on Form 1040-ES.

Newly self-employed people may not have been aware of the Social Security tax, though. In this case, you can make an estimated payment as soon as possible to help avoid any additional penalties or interest. Alternatively, you can pay the taxes when you file your tax return. The sooner you make the tax payment, the fewer penalties and interest you may have to pay.

How Social Security benefits are calculated for self-employed people

How Social Security Works For The Self-Employed - How Social Security benefits are calculated for self-employed people

You may be wondering if Social Security benefits are calculated differently for employees versus self-employed people. The good news is they aren’t. They’re calculated precisely the same way.

First, you must qualify for Social Security benefits. To do that, most people have to earn 40 credits to qualify. You can earn up to four credits each year. In 2021, you earn one credit for each $1,470 in qualifying earnings. If you max out the credits you earn each year, you need ten years’ worth of credits to be eligible for benefits.

After you qualify for benefits, you can start receiving benefit payments. Your benefit payments are calculated using a complex formula. It is based on the amount you paid in Social Security taxes, though.

Currently, the full retirement age for most people is 67. You can take benefits as early as age 62, but the benefit will be reduced by roughly half of a percent for each month you take your benefits early. You can delay your benefits until age 70 and receive a higher payout.

You can also claim Social Security benefits in other ways. For instance, you may get benefits if you are disabled or if your working spouse passes away. 

Can a self-employed person retire on Social Security alone?

In theory, it is possible to live on Social Security benefits alone. While that was never the intent of the Social Security program, many people face this reality daily. You definitely won’t live a lavish lifestyle and may even struggle to make ends meet depending on where you live.

In an ideal world, you’d supplement your Social Security benefits with another source of income. For some people, this may be a pension from an employer, but those are extremely rare in today’s world. Instead, most people should be saving for their retirement above and beyond paying Social Security taxes to boost their retirement funds.

Options to bolster your retirement funding

Self-employed people that want a more comfortable retirement can use the following services to help put money away for their future. 

  • Betterment is a robo-advisor that helps you invest for your goals, including retirement. Their robo-advisor service helps you lower your tax liability by using smart tax strategies. They even keep costs low with a relatively low 0.25% annual management fee. If you opt for their premium service, that fee increases to 0.40%.
  • Wealthfront is another robo-advisor that can help you save for retirement. Wealthfront focuses on minimizing fees by only charging a 0.25% annual advisory fee. Like Betterment, they take advantage of tax-lowering strategies to help you keep more of your money. Wealthfront helps you build a custom portfolio based on your goals and your personal situation. This can be helpful as a self-employed person that may have different needs than a traditional employee.


Social Security taxes for the self-employed are a bit of a bummer. You have to pay both the traditional employee and employer side for a whopping 12.4% total Social Security tax rate. The one small benefit is you get to take half of the cost as a deduction.

Now that you understand how this tax works, you can start setting money aside to pay it in a bank account or a cash account. Since your Social Security benefits won’t necessarily provide you with a comfortable retirement, you should start setting money aside in an investment account, too. Betterment or Wealthfront may be good options depending on your situation.

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About the author

Total Articles: 69
Lance Cothern is the founder of Money Manifesto, a personal finance blog that helps people to master their money so they can live their ideal life. In addition to blogging, he enjoys spending time at the beach with his family. You can connect with Lance on Twitter, Facebook, and LinkedIn.