A typical worker who is employed by a business entity normally does not have to worry about being eligible for Social Security benefits because Social Security taxes directly come out of a worker’s paycheck. But, not everyone has an employer, there are millions of people across the country who is self-employed. These people are responsible for paying taxes into income taxes into federal, state and local entities when required, but also to Social Security if they want to be eligible for Social Security benefits. Typically, unless you pay into Social Security you are not entitled to many of the different programs Social Security offers. Social Security has rules related to self-employment that can be found in the agency’s handbook.
Social Security started offering a way the self-employed could be eligible for benefits beginning in 1951 with some exceptions:
- Farmers, ministers and some other professions were not covered until 1955;
- Additional groups of professionals were covered for taxable year ending after 1955; and
- Self-employed doctors of medicine were covered for taxable years ending on or after December 31, 1965.
How Self-Employment Income Is Calculated
“Self-employment income” that is creditable for Social Security is based on “net earnings from self-employment” derived from a “trade or business” covered by the law.
Payment from self-employment that is not covered under Social Security is included when figuring income for earnings test purposes.
Self-employment can consist of many different things, we are going to take a look at some uncommon types of self-employment and how they are impacted.
Writers Who Receive Royalties
Writers who receive royalties may be engaged in a trade or business. Each case must be decided from the facts. A one-time venture of short duration is usually not a trade or business, but a repetition of such ventures would constitute a trade or business. Thus, if you write only one book as a sideline and never revise it, the writing activities would probably not be a trade or business. However, if you prepare new editions from time to time or write several books, the writing and editing activities would be a trade or business.
You may engage in other related activities which, when considered together with the writing activities, may be a trade or business. For example, if you are a college professor who writes a book on business administration and gives lectures and advice to business groups on the same subject, you would probably be in a trade or business.
Income From Illegal Activity
The illegality of an activity does not prevent it from being a trade or business. For example, professional gamblers, bookies, etc. may be engaged in a trade or business. If you are in this category, you are considered self-employed and are required to report your income and pay self-employment taxes.
Church Employees
Any church or church-controlled organization in existence on September 30, 1984, opposed for religious reasons to the payment of Social Security taxes, could make an election by October 31, 1984, to exclude from employment the services performed by its employees.
Any organization created after September 30, 1984, must file prior to the first date on which a quarterly employment tax return would otherwise be due if it wishes this exclusion.
