Why Self-Employed Individuals Pay More in Social Security Taxes

Why Self-Employed Individuals Pay More in Social Security Taxes

Why Self-Employed Individuals Pay More in Social Security Taxes.Social Security benefits are a vital part of retirement planning, funded through payroll deductions.

Why Self-Employed Individuals Pay More in Social Security Taxes

However, those who are self-employed or own small businesses often find themselves paying more into the Social Security program compared to traditional employees. Here’s an explanation of why this is the case.

The Simple Reason for Higher Self-Employed Taxes

Traditional employees have their Social Security and Medicare taxes withheld by their employers, resulting in a 7.65% combined tax rate (6.2% for Social Security and 1.45% for Medicare). Employers match these contributions. Self-employed individuals, on the other hand, must cover the full 15.3% (7.65% for both programs) out of their earnings, as they lack an employer to share the burden.

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Limited Tax Deductions

Self-employed individuals can deduct half of their Social Security and Medicare taxes from their taxable income. However, this deduction only partially offsets the increased tax liability, leaving them responsible for a significant contribution.

 Consider All Added Costs

Running a business comes with additional financial responsibilities beyond higher Social Security taxes. Self-employed individuals may need to make quarterly estimated tax payments to the IRS, save for retirement without employer contributions, and secure their own health insurance.

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 Incorporate Costs into Business Planning

When starting a business, it’s essential to factor in these added expenses, including taxes, retirement savings, and insurance costs. Adequate research and planning are key to ensuring financial stability when self-employed.

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