Most people who pay into Social Security work for an employer. Their employer deducts Social Security taxes from their paycheck, matches that contribution and sends taxes to the Internal Revenue Service (IRS) and reports wages to Social Security. But what about self-employed people?
You are self-employed if you operate a trade, business or profession, either by yourself or as a partner. Remember that whether you are eligible for Social Security Disability Insurance Benefits and Social Security Retirement Benefits depends on you paying enough in to the Social Security trust fund through FICA taxes. Similarly, how much you receive in benefits depends in large part on how much you pay in through FICA. Unfortunately, with regard to individuals who are self-employed, there are some common problems that tend to come up.
Problem 1: Paying Federal Income Taxes, But Not FICA
Over the years, I have seen several individuals who filed their own returns and honestly thought they had paid all of their taxes. The problem for these individuals was that they had paid their federal income tax, but had failed to take out money for FICA and Medicare on themselves. The end result was that when they became medically disabled they were not eligible for Disability Insurance Benefits, because they did not have a sufficient amount paid in to FICA, recently enough.
Problem 2: The Married Couple Running a Joint Business But Only Pays Taxes on One Person
Many small family businesses operate with work from both spouses. Typically, these couples will file a joint tax return at the end of the year. Unfortunately, when the husband and wife file taxes, a common mistake is to pay FICA taxes on only one spouse. The end result of this is that the other spouse ends up losing eligibility for Social Security Disability because she is not paying into FICA.
Problem 3: Mistakenly Thinking You “Didn’t Make Enough to File Taxes”
Over the years, I have had dozens of clients who had gone from hourly or salaried jobs to some kind of self-employment. Typically, while they were working for an employer, they were paying into FICA and covered by Social Security Disability. However, once people start working for themselves, it is all too easy to neglect paying taxes. This typically is the case with many disability claimants, because they become “self-employed” only because they were physically unable to perform the demands of their former employment. For many individuals in this position, their “self-employment” consists of doing whatever odd job they can scrape up to keep a roof over their heads. For individuals in this situation, a common misconception is that the small amount of money that they are scraping together each year does not require them to pay taxes. This is usually wrong and can result in a loss of coverage for Social Security Disability Benefits.
As a reminder, eligibility for Social Security Disability Benefits depends on you recently paying enough into FICA. (For more see my past blog on Social Security Date Last Insured-http://www.donatilaw.com/blog/what-is-my-date-last-insured.) Further, it doesn’t take much in earnings to maintain coverage. For 2013, it takes $1160 to earn 1 quarter of coverage. Four quarters can be earned a year, so with only $4640 earned in 2013 you can extend your coverage for disability by a year. Thus, even if you are making minimal income being “self-employed” it is still important that you file your taxes at the end of the year on this income.
Finally, keep in mind that all of your earnings covered by Social Security are used to figure your Social Security benefit. So, it is important that you report ALL earnings up to the maximum, as required by law.
You must complete the following federal tax forms by April 15 after any year in which you have net earnings:
- Form 1040 (U.S. Individual Income Tax Return);
- Schedule C (Profit or Loss from Business) or Schedule F (Profit or Loss from Farming) as appropriate; and
- Schedule SE (Self-Employment Tax).
You can get these forms from IRS on their website at http://www.irs.gov/
Send the tax return and schedules along with your self-employment tax to IRS.