American pay different types of taxes such as income tax, state tax, state tax real estate tax, social security tax, medicare tax, etc. The major objective of the tax law is to raise revenue. But mostly, taxes are raised to secure the welfare of citizen. This article focuses on the social security and medicare tax and the benefit of paying this tax as a self-employment person.
What is Social Security and Medicare tax
Social Security and Medicare taxes are known by many different names depending on the context it is being discussed. If discussed as part of an employer payroll system, there are known as payroll taxes. If paid for a self-employed individual it is called self-employment taxes. Finally if discussed as enacted under the law they are called FICA- Federal Insurance Contribution Act.
Under the FICA act, Americans are forced to save 12.4% of earned income for social security and 2.9% for Medicare. If you are employed by someone else, your employer is obligated to pay half of these taxes on your behalf.
Social security and Medicare are forced savings account to protect Americans from becoming totally destitute at retirement. At the age of 62 you can choose to start receiving benefits: This is not advisable as your monthly payment depends on when you start receiving benefits.
Check your social security account
Social security benefits are determined by your work history. Your work history is reported by your employer or you – if you are self-employed. It is important to check this history as sometimes employers report your wages using the wrong social security number. This will mean you are not rightly credited for working if your information is incorrect.
Go to http://www.ssa.gov/myaccount/ and register for your account. Once you register you can see your work history as reported to social security. If there are any errors, you can contact social security to make the correction. Correcting an error now is much easier than waiting till retirement.
Moreover, ssa.gov tells you how much benefit you and your family are eligible for based on your contribution history.
Don’t depend totally on social security
Many boomers who retired depending totally on social security and defined benefit pensions are finding that the income they receive is not enough. You are still responsible for planning for retirement – do not totally depend on the government. The average social security monthly payment is $1,282. This is hardly enough to make a decent living in most parts of the United States.
Social security and Medicare taxes are not bad taxes
As a self-employed person, there is the tendency to want to pay as little taxes as possible. While tax planning (not tax evasion) is a great way to minimize taxes, care must be taken to strike a balance on how you plan for retirement.
Social security and Medicare taxes are part of a retirement plan. When you pay these taxes you eventually get it back. So avoiding paying it now could hamper your benefits in the future. As a self-employed person, it is important to see the bigger picture