Gig Workers Social Security: What You Need to Know
Whether you’re still in your working years or are collecting Social Security retirement benefits, it’s important to understand how gig economy jobs will affect what you receive from Social Security.
How does Social Security work?
Social Security retirement benefits are based on an average of your lifetime earnings. The benefit is a percentage of your earned income that varies based on your income level.
Depending on when you start to claim Social Security, continuing to work may temporarily reduce your benefit or cause some of it to be taxed.
Do gig jobs count towards your Social Security earnings record?
Yes, 1099 income counts towards your Social Security earnings and work credits. Your average lifetime earnings are based on your total earned income for each year. That includes both traditional W-2 jobs and gig 1099 jobs added together.
Don’t forget that there’s a maximum annual income that can count towards Social Security each year and that you pay Social Security taxes on. Once you hit that limit, you can’t increase it by adding another job. It’s on your total income.
How does Social Security count gig income?
Your annual earnings from a gig for Social Security purposes is the net profit from your Schedule C. Money you deduced as business expenses doesn’t count towards your Social Security record. So if you get “creative” with your deductions, you may be reducing your retirement benefits.
Example: $10,000 in gig earnings with $4,000 in deductible business expenses. Your net profit is $6,000, and $6,000 gets added to your Social Security record for that year.
Important: Leaving off deductions to increase your Social Security benefits is tax and Social Security fraud. While it may seem like over reporting your income is fine because you’d be paying extra taxes, you’d be doing it to claim a government benefit you’re not entitled to. This does not mean you can’t find ways to reduce your expenses. You just have to accurately file your tax return including deducting the business expenses that you did have.
Do self-employed retirement contributions reduce your Social Security tax or earnings?
No, contributions to a Solo 401(k), SEP IRA, or other self-employed retirement account do not reduce your Social Security tax or earnings history. They only reduce your income taxes.
Do gig jobs count for Social Security credits?
Yes, gig income as described above can be used to meet the minimum income requirements for the credits you need to qualify for Social Security benefits.
Do you pay Social Security tax on income above the maximum?
There is a maximum income that counts towards your Social Security earnings each year. For 2022, it’s $147,000. You don’t pay Social Security tax on income above that amount.
If you have W-2 income at or above the cap, your Social Security taxes will be paid in full through your employer. You will not pay the 12.4% Social Security portion of the self-employment tax on your gig income.
If a combination of W-2 and gig income brings you above the cap, you will pay 12.4% in Social Security taxes on the difference between your W-2 income and the cap. If you pay too much in estimated taxes because you overestimated your Social Security tax, you’ll get a refund when you file your tax return.
Can taking a gig job in retirement reduce your average lifetime earnings?
If you retire early from your main job and take a part-time job for supplemental income or for something to do, it will not reduce your average lifetime earnings even if you’re now earning less. Social Security retirement benefits are based on your highest 35 years not your most recent 35 years of work.
If you worked for less than 35 years, the average isn’t just over your working years. It’s your income in your working years plus $0 per year for the remaining years to reach 35 years. Therefore, adding additional years of work above $0 will typically increase your earnings depending on your income level.
How much can you earn from a gig job and still receive Social Security retirement benefits?
It depends on if you’ve reached full retirement age.
- If you begin claiming benefits before full retirement age, your benefits are reduced by $1 for every $2 you earn above the annual limit. For 2022, the annual limit is $19,560.
- In the year you reach full retirement age, your benefits are reduced by $1 for every $3 you earn above a different annual limit but only in the months before you reach full retirement age. For 2022, the annual limit is $51,960.
- Once you reach full retirement age, your benefits are not reduced.
Any reductions are added to your benefit for future years. However, because delaying when you start claiming benefits can increase what you receive, you may receive less if you claim early and continue working versus if you had delayed starting your benefits. Work with a financial planner to figure out the best time to claim benefits based on your plans to continue working.
What if my gig job is one of my highest earning years but I’ve already started claiming Social Security?
If you earn more from a gig job in a year than in one of the 35 years originally used to calculate your Social Security benefits, your benefit will be recalculated and increased. The increase takes effect in the January following the year in which you earned the money. If there’s a delay in the recalculation, such as the time it takes to file your tax return, the increase is retroactive.
Can a gig economy job make my Social Security benefits taxable?
A portion of your Social Security benefits may be subject to income taxes if your combined income exceeds certain limits. Combined income is your adjusted gross income (including gig earnings) plus one half of your Social Security benefits plus nontaxable interest (such as municipal bonds).
Tax on Social Security Benefits
| Percent of Benefits Taxed: | 50% | 85% |
|---|---|---|
| Single Filer Income Range: | $25,000 to $34,000 | > $34,000 |
| Joint Filer Income Range: | $32,000 to $44,000 | >$44,000 |
Percent of benefits taxed means what percent of your benefits get taxed on your ordinary income tax rate based on your tax bracket. It’s not a 50% or 85% tax rate. For example, if your combined income is $34,000, half of your Social Security is tax-free, and the other half is taxed at 10%, 12%, or whatever your marginal tax rate is.
Again, talk to a financial planner to decide when to claim benefits and how to plan all of your sources of income.
Frequently Asked Questions
Do gig workers pay Social Security?
Does 1099 income count towards Social Security?
Conclusion
If you’re taking a job in the gig economy, you should understand the Social Security implications.
You’ll pay Social Security taxes based on your net profits. If you’re in retirement age, you should also be aware of the possibility for taxes on your benefits.
It can be a good idea to discuss your situation with a financial planner to make sure you maximize your earnings and benefits.
