Being a freelance worker certainly has its perks -- you can make your own schedule, take on projects that interest you, and ultimately report to yourself alone. But there's a downside, and it's that you lose out on the many benefits salaried employees get, from paid time off to subsidized health insurance. Thankfully, there's one benefit you won't have to forgo if you pursue a freelance career: Social Security.
Just as salaried employees are eligible for Social Security (provided they rack up enough lifetime credits), so too can former freelance workers collect those benefits when they're older. That's because as a freelancer, you're still paying self-employment taxes on your earnings, which cover what you owe for Social Security and Medicare.
How self-employment taxes work
When you are a classified as an employee, Social Security taxes are deducted from your paychecks automatically by your employer. Workers are required to pay 12.4% of their income into Social Security, up to a certain threshold that changes every year -- currently $128,400. Standard employees will see half of that tax (6.2%) coming out of their gross pay -- your employer is tasked with paying the rest. But if you're a freelancer, the system works differently.
As a freelancer or contractor, you don't technically have an employer to pay a portion of those taxes on your behalf, so you're responsible for the entire 12.4%. Furthermore, you'll need to submit those taxes -- along with your normal income taxes -- in the form of estimated quarterly payments throughout the year.
Now if you're thinking that it's unfair for freelancers to have to pay double the Social Security tax, keep the following in mind: You can deduct half of those payments when you file your tax return. So while you are paying more up front, you do get some of that money back.
Can you collect Social Security if you only worked as a freelancer?
Your ability to claim Social Security benefits as a senior doesn't depend on your employment status during your career. Rather, it's a function of how many credits you accumulate throughout your working years.
To collect Social Security, you must rack up 40 lifetime working credits, and you can earn up to four credits per year. Though the value of these credits changes annually: Currently, a single credit requires $1,320 of earnings, so to hit the threshold for those four credits requires a minimum of just $5,280 in income per year. As long as you wind up with 40 credits by the time you're ready to file, you can collect benefits. It doesn't matter if the income that earned you those credits stemmed from a freelance situation or a steady paycheck.
As long as you pay into Social Security, it'll pay you money when you're older. So if you're self-employed, keep submitting your taxes quarterly and be patient: One day, you'll get to reap the benefits.