Usually, an employer deducts Social Security taxes from your pay and reports how much you earn each year to the Social Security Administration. But if you’re self-employed, it’s up to you to pay your Social Security taxes to the IRS and report your earnings. Just like when you work for an employer, the government counts your net earnings from self-employment toward your Social Security earnings.
Report your annual net earnings of $400 or more on Form 1040, Schedule C or Schedule F, and Schedule SE. Even if you don’t owe any federal income tax, you have to complete Form 1040 and Schedule SE to pay your self-employment Social Security tax to the IRS.
File Schedule SE using the farm or nonfarm optional method to figure your net earnings from self-employment if you're claiming a business loss or made little income from self-employment. You can find the optional methods for computing your self-employment tax under Part II on page 2 of Long Schedule SE. Using one of these optional methods gets you credit for Social Security by increasing your self-employment tax even if you would have owed less or no tax at all using the regular method.
For the 2012 tax year, you can use the farm optional method to figure your net earnings from self-employment if your gross farm income isn't more than $6,780 or your net farm profits are less than $4,894. To use the nonfarm optional method, your net profits from nonfarm self-employment must be less than $4,894 and less than 72.189 percent of your gross nonfarm income. You also had to have net earnings from self-employment of at least $400 in two of the previous three tax years.
File your taxes on time. Pay any self-employment taxes you owe to the IRS. Until you cough up the money to pay Uncle Sam, Social Security doesn’t give you the work credits. It won’t matter that you’ve earned them.
Keep your profit up and your deductible business expenses down to help you earn the yearly maximum of four credits that you're allowed. For the 2012 tax year, you must have net earnings of $4,520 or more to get all four credits. Otherwise, you earn one credit for every $1,130 in net earnings. To get Social Security benefits when you retire, you need a total of at least 40 credits over your working lifetime.
Request a Benefit Statement from Social Security. Check your statement to make sure that everything jives. Look to see that it shows the right amount of earnings for each year you worked. Call the nearest Social Security Administration office or view your Social Security statement online. Individuals age 18 and older can sign up to access a statement online.
- Writing off more than you make shows your business is operating at a loss and you won't owe Social Security taxes. You also won't earn the credits you need unless you use one of the optional methods to figure your net earnings from self-employment.
Amber Keefer has more than 25 years of experience working in the fields of human services and health care administration. Writing professionally since 1997, she has written articles covering business and finance, health, fitness, parenting and senior living issues for both print and online publications. Keefer holds a B.A. from Bloomsburg University of Pennsylvania and an M.B.A. in health care management from Baker College.