Why Self-Employed People Might Not Want to Reach $0 Taxable Income

Did you know that most self-employed people who claim disability insurance are actually getting it from their social security benefit?

Did you know that no one automatically gets social security benefits?  That you actually have to pay into it in order to have a benefit there for you?

Here in lies one of the many problems with claiming $0 taxable income on your return.  When you work for someone else as an employee, your employer takes your half of your social security payment out of your paycheck to send in, and they pay the other half of your payment.  As a self-employed person, we are responsible for paying BOTH halves of that payment (this is the “self-employment tax” that everyone complains about).

But did you know, that by claiming $0 taxable income, you are not paying anything into your SS bucket, and therefore, will not have any SS available when the time comes to call on it?  As a self-employed person, this is ALSO the bucket that you would pull from if you require a disability benefit. Unless you have other private disability insurance, you may be leaning on this benefit to pull out disability should you become injured and unable to work. 

Most self-employed people have been coached that you should try to report as little income as possible in order to pay the least amount of tax possible.  The problem with this, is that unless you have been writing checks specifically to the Social Security Administration (SSA), you have not been paying into and earning credits toward your Social Security and Disability Insurance.

The good news is, you can still claim $0 taxable income, AND make a contribution to your SSA account.  There is a selection on your tax return called the “Optional Method” (or “Farm Optional Method” if you are a Farmer and file on Schedule F), which will allow you to make a payment SPECIFICALLY to the SSA in order to fund your SSA account, while still claiming $0 for your federal income tax.  There is a calculation that will help you determine exactly what amount to send in, and which paperwork to send with it so that your payment gets allocated properly.

For more information on the Optional Method or Farm Optional Method, ask your tax preparer, or shoot me an email at Sabrina@Sernatax.com

*Disclaimer: This post does not contain any tax advice.  These are simply concepts you should consider and discuss with your tax advisor.  Without knowing your specific situation, and having an engagement letter in place, I cannot provide specific tax advice over an internet post or video.  To discuss your specific tax situation, feel free to send me an email to make an appointment for consultation.