How Does Self-Employment Affect Social Security Benefits?

Self-employment offers autonomy, but it also brings unique responsibilities for retirement planning with Social Security. For individuals who work for themselves, understanding how earnings translate into future benefits is a fundamental aspect of financial management. The system is designed for all workers, but the mechanisms for self-employed individuals differ from those for traditional employees. This article explains how self-employment income is taxed, how it helps you qualify for benefits, how the benefit amount is determined, and the rules for receiving payments while still working.

Paying into Social Security as a Self-Employed Individual

Individuals who work for themselves are responsible for paying their Social Security and Medicare contributions through the Self-Employment (SE) tax. This is the equivalent of the Federal Insurance Contributions Act (FICA) taxes paid by employees and their employers, covering contributions for independent contractors, freelancers, and small business owners.

The SE tax rate is 15.3%, composed of two parts: a 12.4% tax for Social Security and a 2.9% tax for Medicare. This combined rate mirrors the total FICA contribution, as a self-employed person is responsible for both the employee and employer portions.

This tax is levied on net earnings from self-employment, which is your gross income minus ordinary and necessary business expenses. An individual must pay SE tax if their net earnings are $400 or more in a year. This calculation is done using Schedule C and the result is used on Schedule SE to figure the tax due.

For 2025, the 12.4% Social Security tax applies only to the first $176,100 of combined wages and net earnings. There is no income limit for the 2.9% Medicare portion, which applies to all net earnings. If an individual has both W-2 wages and self-employment income, the wages are counted first toward the limit.

The tax code provides two adjustments for the self-employed. First, the amount of net earnings subject to SE tax is 92.35% of the total net profit from the business. Second, taxpayers can deduct one-half of their total SE tax paid when calculating their adjusted gross income (AGI) on Form 1040. This is an above-the-line deduction, meaning it can be taken even if the taxpayer does not itemize.

Earning Social Security Credits Through Self-Employment

Eligibility for Social Security retirement benefits is determined by a credit system. To qualify, a worker must accumulate a certain number of credits, which for most people is 40 credits over their working life, equivalent to 10 years of work. Self-employed individuals earn credits based on their reported income.

The Social Security Administration (SSA) awards credits based on annual earnings. In 2025, a worker receives one Social Security credit for every $1,810 of earnings. This dollar amount is adjusted annually to account for changes in average wage levels.

A maximum of four credits can be earned in any single year. To earn all four credits in 2025, a self-employed individual must have at least $7,240 in net earnings. Any net earnings above this amount will contribute to a higher potential benefit but will not result in more than four credits for the year.

For example, a freelancer with net earnings of $8,000 in 2025 earns the maximum four credits for that year, just as a consultant with $100,000 in net earnings would. The credits you earn remain on your Social Security record permanently, securing your progress toward eligibility.

How Self-Employment Income Factors into Benefit Calculations

While credits determine eligibility, the dollar amount of your monthly benefit is based on your lifetime earnings. The net earnings from your self-employment, once reported to the IRS, are treated the same as W-2 wages for this calculation.

The SSA calculates your retirement benefit using your highest 35 years of earnings. To ensure fairness, the SSA “indexes” your past income to account for the general rise in the standard of living, adjusting historical earnings to a value closer to today’s dollars.

After indexing, the SSA adds the totals from your 35 highest-earning years and divides by 420 (the number of months in 35 years) to find your Average Indexed Monthly Earnings (AIME). If you have fewer than 35 years of earnings, the SSA inputs zeros for the missing years, which will lower your AIME and your benefit amount.

The AIME is then used in a progressive formula to determine your Primary Insurance Amount (PIA), which is the benefit you receive at full retirement age. For 2025, the formula provides 90% of the first $1,226 of AIME, 32% of the AIME between $1,226 and $7,391, and 15% of any AIME above $7,391. This structure provides a stronger safety net for those with lower lifetime earnings.

Receiving Benefits While Continuing to Work

If you continue working after you begin receiving Social Security benefits but are under your full retirement age (FRA), there are limits on how much you can earn before your benefits are reduced. This is the annual earnings test. Once you reach your FRA, which ranges from 66 to 67 depending on your birth year, the earnings limit no longer applies.

For 2025, if you are under your FRA for the entire year, you can earn up to $23,400 without any reduction in benefits. The Social Security Administration will withhold $1 in benefits for every $2 you earn above this limit. A more generous limit applies in the year you reach your FRA. In 2025, during the months before your birth month, you can earn up to $62,160, with the SSA withholding $1 for every $3 earned above this higher limit.

For self-employed individuals, the SSA also evaluates whether you are performing “substantial services” in your business. The SSA considers you to be performing substantial services if you work more than 45 hours a month in your business. Work between 15 and 45 hours per month may also be considered substantial if it is in a highly skilled occupation.

This substantial services test is a key distinction for the self-employed, as it means that even with low net earnings, your benefits could be reduced if your work activity is considered substantial. However, if you do not perform substantial services in a given month, you may receive your full benefit for that month, regardless of your annual earnings. This special rule can be used for one year, often the first year of retirement.