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All income made by United States citizens and residents is subject to a Social Security tax. In this article, we’ll define the term “self-employment income” and explain how Social Security taxes apply to it.

Key Takeaways 

  • Self-employment income is any income received from performing personal services that cannot be classified as wages
  • Like employees, individuals making self-employment income must pay Medicare and Social Security taxes
  • Self-employment income is subject to a 15.3% Social Security and Medicare tax, with the self-employed being required to pay both the employee and the employer’s part of the contribution 
  • Social Security benefits are calculated on the basis of an individual’s taxable earnings history during their 35 highest-earning years 

What Is Self-Employment Income?

According to the IRS, self-employment income is any income that an individual receives from performing personal services that cannot be classified as wages because there is no employee/employer relationship between the payee and payer. The Internal Revenue Code imposes a self-employment tax on self-employment income for all U.S. citizens and residents. 

Self-Employment Income and Social Security

Employees who make wages in the United States must pay Medicare and Social Security taxes. This contributes to their coverage under the U.S. Social Security system, making them eligible for Social Security benefits such as retirement and disability benefits. Employers automatically deduct these taxes from each wage payment. In addition, employers must also match the employee’s Social Security taxes.

While the self-employed do not have Social Security taxes automatically deducted from their wages, they must still pay Social Security tax. In fact, they must contribute both the employee's and the employer’s portion for a total of 15.3%. This is not withheld from paychecks but rather paid when filing an annual federal income tax return. Note that this 15.3% is not calculated based on gross income but rather taxable earnings after expenses are deducted. 

Just like employees paid wages by an employer, those who pay Social Security taxes on self-employment income receive Social Security coverage in return. One’s Social Security retirement benefits are calculated based on their earnings history and Social Security taxes paid. Specifically, Social Security earnings history is calculated based on an individual’s 35 highest-earning years. 

In order to be certain that you are paying the right Social Security taxes on self-employment income in order to be eligible for Social Security benefits, it can be helpful to consult with a financial planner or other Social Security expert.

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