Few people love paying taxes, but here’s a reason to make sure you pay the full amount.
The amount of income you report on your taxes influences the size of your Social Security checks when you retire.
You may already know that some taxes go towards Social Security, which is money Americans are eligible to receive every month after turning 65.
But it’s helpful to know a little more about how your benefit is calculated, if only to make sure that you don’t miss out on money later in life.
It’s a complex formula, but here are a couple important numbers to understand.
You need to have worked (and paid your Social Security taxes on) a minimum of 40 quarters (or 10 years total) to be eligible for the benefit.
The size of your benefit is based on the average of your highest 35 years of income.
What that means: if you don’t report your income, or don’t report all of your income, then your Social Security checks will take a hit.
That’s especially important for freelancers, who face extra challenges saving money for retirement.
For one, freelancers have to take the initiative to put money aside, compared to employees who often have employer-sponsored retirement plans. (Note: Catch makes it easy for freelancers to automatically set money aside into a variety of retirement plans).
Another challenge is that freelancers may have more expenses than traditional employees, such as self-employment tax. This is the tax that funds Social Security. Broadly, this tax goes by a few different names (also known as FICA tax or payroll tax), but there’s one significant difference for freelancers. While employers generally cover half the tax bill with their employees, freelancers must pay the entire amount themselves.
The self-employment tax rate is 15.3%, and it has two parts. 12.4% of it goes towards Social Security, and the remaining 2.9% is for Medicare (health insurance for the elderly that’s covered by the government).
Trouble keeping track of your income?
Many freelancers earn from multiple sources and get many payments, so staying organized can be a challenge. Catch can help withhold taxes from your income, estimate your tax payments, and even automatically send your quarterly payments to the IRS. What’s more, Catch can walk you through retirement options in plain language and help you set up automatic contributions.
Social Security is unlikely to offer enough for a comfortable retirement by itself, so make sure you’re maximizing the size of your checks by reporting all your income this year (and every tax season). It may be tempting, but if you don’t report your income, your checks will be smaller.