Are You Paying This Hidden Social Security Tax?
You say you’re tired of punching that clock each day, the pinhead boss, the stale coffee, and the office politics?
Enough is enough.
You’ve been planning to breakout on your own for a long time. You have your business plan.
You have customers lined up.
Now you’re ready to pull the plug and enjoy the freedom that comes with self-employment.
Well, I worked as an employee for a bunch of years and for the last decade I’ve owned my own business so I can totally relate.
And there are indeed advantages of being out on your own, including:
· The ability to follow your passion
· Making your own decisions rather than following orders
· Setting your own hours
· Surrounding yourself with people you like
· Plus, choosing where you work
Overall, as a self-employed entrepreneur, you have the freedom to make decisions that shape your lifestyle and financial future.
But there is one thing you may have not factored in to your analysis… something I’m reminded of every year I do my taxes…
The fact that Social Security and Medicare taxes actually take a full 15.3% of your earnings.
In 2018, 12.4% of your money goes into the Old-Age, Survivors, and Disability Insurance (OASDI) fund — generally known as the Social Security tax — on self-employment income up to $128,400.
Then, on top of that, another 2.9% of your earnings goes toward the Medicare Hospital Insurance portion of the self-employment tax … and there is no limit on how much money is subject to this tax.
You must pay all of this tax if you are the owner of a small business that is a sole proprietorship (including independent contractors), a partner in a partnership, or a member of a limited liability company (LLC).
For example, let’s assume you earn $80,000 in your business.
You’ll have to kick in $9,920 for Social Security plus another $2,320 for Medicare.
Total? $12,240 — more than $1,000 a month.
That’s a lot when you’re starting a new business.
And the Treasury Department wants its money every three months even if you’re receiving Social Security benefits!
The one good piece of news is that you also get to take a deduction for half of what you’re paying in.
Reason: The half that employers are paying in on behalf of their employees isn’t counted as income, either.
Which brings up an important point…
Even if you have no desire to start your own business, the actual 15.3% tax rate for Social Security and Medicare is something to keep in mind as a regular employee working for someone else.
After all, it means your boss is paying you 7.65% more than you thought!
If you’re still an employee, you pay 6.2% into Social Security each pay period, and another 1.45% for Medicare for a total of 7.65%.
If we use that same $80,000 number as your salary, you’ll see $4,960 deducted from your paycheck over the course of the year for Social Security and $1,160 for Medicare.
What you don’t see is that your boss is putting in the same amount. That means another $6,120 is going towards your Social Security and the nation’s Medicare system.
That $6,120 doesn’t appear on your paystub, on your benefit statement, or on your end-of-the-year W-2 form.
No wonder few employees know about it!
By now you might be thinking:
“I’d be paying double the amount into Social Security and Medicare if I was on my own, yet I’ll get the same benefits when I retire.”
Hey, maybe your boss isn’t so bad after all!
Your employer is well aware of this added expense, of course. They include it when evaluating your total compensation. So even though they’re paying you an $80,000 salary, you’re costing them $86,120.
The bottom line here is that whether you are self-employed or work as an employee, you’re going to pay (directly or indirectly) the full tab into Social Security and Medicare.
It’s important to keep the real number in mind both for compensation purposes and to have a better handle on just how much these programs are actually costing us all.
To a richer life,
Editor, The Rich Life Roadmap