Purposes of Self-Employment Tax
The Internal Revenue Service requires certain individuals who have a trade or business to pay self-employment tax. What is the reason for this?
Social Security Withholdings
If you work for someone else, your employer is required under federal law to withhold certain amounts for Social Security coverage when you retire. Social Security coverage includes retirement benefits, disability benefits, survivor benefits, and hospital insurance benefits (Medicare).
Preparing for Your Retirement
When you are self-employed, you are responsible for making these Social Security contributions on your own, by way of the self-employment tax. It is very important that you carefully calculate the proper amount you must pay. Failure to do so may result in a lower amount of Social Security benefits when you retire.
You Must Still Qualify for Social Security
The Social Security Administration (SSA) regulates Social Security benefits. You qualify for Social Security benefits if:
- You have a Social Security number
- You earn the required number of credits, based upon amount of income earned per quarter. Currently the maximum number of credits you can earn per year is four.
File On Time
You must file your tax returns, and report self-employment income, in a timely manner. The Social Security Administration will not give you credit for self-employment income reported after a period of time from the year in which the income was earned. And if the SSA needs to make adjustments because of a late reporting, it will be to remove or reduce your coverage, not increase it.
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