Benefits Planner: Retirement | Calculate Your Net Earnings from Self-Employment (2024)

FAQs

How do I plan for retirement if I am self-employed? ›

For self-employed workers, setting up a retirement plan is a do-it-yourself job. There are four available plans tailored for the self-employed: one-participant 401(k), SEP IRA, SIMPLE IRA, and Keogh plan. Health savings plans (HSAs) and traditional and Roth IRAs are supplemental options.

Net earnings for Social Security are your gross earnings from your trade or business, minus your allowable business deductions and depreciation. Some income doesn't count for Social Security and shouldn't be included in figuring your net earnings.

You calculate net earnings by subtracting ordinary and necessary trade or business expenses from the gross income you derived from your trade or business. You can be liable for paying self-employment tax even if you currently receive Social Security benefits.

A one-participant 401(k) plan is sometimes referred to as a “solo-401(k),” “individual 401(k)” or “uni-401(k).” It is generally the same as other 401(k) plans, but because there are no employees other than your spouse who work for the business, it is exempt from discrimination testing.

There's no best pension for the self-employed, and what fits best will depend upon your individual circ*mstances. Using a provider such as PensionBee, which lets you make contributions as and when you want can be a good option though, because your income may not be as predictable as you'd like.

Which Should I Choose? Which you choose depends on the circ*mstance of your business. Those who have full-time employees can save for retirement using a SEP IRA, while solo practitioners can opt for a solo 401(k) that has higher contribution limits and other advantages.

Self-employed workers must pay both the employee and employer portions of Social Security taxes. Reducing your income by taking every available deduction will lower your taxes but it will also decrease the size of your Social Security benefits in retirement.

However, self-employed people must report their earnings and pay their Social Security taxes directly to the IRS. These taxes will help determine your eligibility for benefits later. You're self-employed if you operate a trade, business, or profession, either by yourself or as a partner.

Social Security tax FAQs

Social Security income can be taxable no matter how old you are. It all depends on whether your total combined income exceeds a certain level set for your filing status. You may have heard that Social Security income is not taxed after age 70; this is false.

You would not be required to file a tax return. But you might want to file a return, because even though you are not required to pay taxes on your Social Security, you may be able to get a refund of any money withheld from your paycheck for taxes.

What is considered income for Social Security benefits? ›

Income is anything you receive during a calendar month and can use to meet your needs for food or shelter. It may be in cash or in kind. In-kind income is not cash; it is food or shelter, or something you can use to get food or shelter.

A solo 401(k) often provides the highest savings potential for self-employed individuals. Fidelity Learn.

If you're self-employed and don't employ others, you are eligible to open a solo 401(k). A couple running a business together also qualifies. You can contribute to your solo 401(k) as both employer and employee. You can choose between a traditional plan or a Roth plan.

Instead of withholding Social Security taxes from each paycheck—many self-employed people don't get regular paychecks—you pay all the Social Security taxes on your net earnings when you file your annual federal income tax return.

Anyone earning income can open and contribute to an individual retirement account, or IRA. A traditional IRA is taxed when you withdraw funds in retirement (defined as age 59 ½ or older), giving you more money to invest before then. Contributions to a Roth IRA, meanwhile, are made with after-tax dollars.

The rule is that, if you're self-employed, you can receive full benefits for any month in which Social Security considers you retired. To be considered retired, you must not have earned over the income limit and you must not have performed what Social Security considers substantial services.