What Are Self-Employment Taxes?
To understand why an elderly person would ask if they pay Self-Employment taxes after they begin collecting Social Security checks, one would need to understand what self employment taxes really are. Self-Employment taxes are comprised of two elements – Social Security taxes and Medicare taxes. All American earners pay into each of these two tax structures. Of the total 15.3% tax that is levied against the self-employed, a total of 12.4% goes to pay Social Security payments and the remainder, or 2.9% goes to pay for Medicare benefits. These rates are non-negotiable, and are levied against the net income of the self-employment venture, whatever that may be.
By the way, Self-Employment taxes are not levied against rental income, which is a very popular type of income for the retirees. The IRS doesn’t construe passive income – such as rental income – to be earnings. And it is earnings, and earnings only, that has Social Security and Medicare tax levied against it.
Many retirees are unaware that their Social Security may be taxable as a result of being self-employed, and creating self-employment net income
Why Would An Individual Who Is Receiving Social Security Benefits Worry About Self-Employment Taxes?
The short answer is, because many elderly people still are self-employed in some venture. In fact, according to the National Council on Aging, Americans over the age of 65 were twice as likely to be employed (over 8 million people fit this category as of this writing) as Americans less than 20 years old. And if the elderly are employed, and working for an employer, thousands (if not millions) are also self-employed, either earning a full living from their self-employment, or subsidizing their Social Security in a meaningful way. Since the 2008 credit crisis, and the extreme downturn in the markets, still many elderly found that their 401k’s or pensions were simply not enough, when coupled with their Social Security benefits, to sustain a type of retirement that they were hoping for. So they either pursued some sort of employment, or began a self-employed venture for themselves.
So the question is legitimate, and makes sense to ask. If I’m self-employed, and Self-Employment taxes are levied in order to pay for my Social Security, and I’m currently receiving those social security benefits, do I have to still pay for those? I’m sorry to tell you, but yes you do.
As long as Americans work, they will pay payroll taxes, or self-employment taxes if they work for themselves. Young and old, men and women, black and white, we all pay self-employment tax as long as we are self-employed and our self-employment venture is creating net income. In the same way as when an individual retires from a job employment taxes end, the same is true for the self-employed. There are only two ways in which to stop the bleeding of Self-Employment tax. One is to stop creating net income from your self-employment venture, the second is to stop the self-employment venture altogether.