Social Security payments for self-employed contractors - calculating benefits and best time to collect?

Social Security actually calculates your benefit based on your highest 35 years of earnings, not 6 years. As a self-employed contractor, you'll pay both the employer and employee portions of Social Security taxes (called Self-Employment Tax) when you file your annual tax return using Schedule SE. For 2025, you'll pay 15.3% total (12.4% for Social Security on earnings up to $175,800 and 2.9% for Medicare with no cap). Make sure you're setting aside enough to cover this! As for working while collecting benefits, if you claim before your Full Retirement Age (probably 67 for you), there is an earnings limit ($23,720 in 2024, will be higher in 2025). Earn over that and they withhold $1 in benefits for every $2 you earn above the limit. Once you reach your FRA, there's no earnings limit - you can earn any amount without reduction.

I was in ur EXACT same situation 5 yrs ago!! the self employment tax thing is a KILLER, no1 warns u about that! i got hit with a huge tax bill my first year bc i didnt set aside enuf $ for it. def talk to a accountant if u can afford it

The previous posters covered the basics well, but I wanted to add some strategic advice about your timing question. Since you're 55 now and planning to retire at 65, you actually have some excellent planning opportunities. If you have 35 solid years of earnings already (including your W-2 years), then any low-earning years as you phase into retirement won't hurt you much. They'll just replace other low-earning years from early in your career. As for when to collect - mathematically, if you're healthy and have family longevity, waiting until age 70 to collect will maximize your lifetime benefits. Your benefit increases by 8% for each year you delay past your Full Retirement Age (likely 67). That's a guaranteed 24% increase if you wait from 67 to 70. However, if you need the income at 65 or have health concerns, claiming earlier might make sense. This is really an individual decision based on your complete financial picture.

Regarding your question about paying into Social Security as a contractor: You'll need to make quarterly estimated tax payments that include your Self-Employment (SE) tax. The good news is that you can deduct half of your SE tax from your income taxes. Also, there are retirement savings options that can help offset your tax burden while building additional retirement funds, like a Solo 401(k) or SEP IRA with much higher contribution limits than regular IRAs. These won't directly affect your Social Security benefit calculation but will give you more retirement security overall.

I went through the EXACT same situation after 30 years at my company!! Let me tell you, the nightmare begins when you try to GET ANSWERS from SSA!!! I spent THREE WEEKS trying to get someone on the phone to explain how my contractor years would affect my calculation. Called HUNDREDS of times, got disconnected, put on eternal holds, it was MADDENING!!!

I'd like to address a few misconceptions in this thread: 1) Social Security benefits are calculated based on your 35 highest-earning years, indexed for inflation. It's not just the raw dollar amounts, but how those earnings compared to national averages in each year. 2) As a self-employed person, your net earnings from self-employment (not gross income) are what count toward Social Security. This is your business income minus business expenses, multiplied by 92.35%. 3) Regarding the earnings limit: For 2024, if you're under Full Retirement Age for the whole year, the limit is $22,320 (not $23,720 as mentioned above). In the year you reach FRA, the limit jumps to $59,520 for months before reaching FRA. These will increase for 2025. 4) There is a complex calculation called the Windfall Elimination Provision (WEP) that can reduce benefits if you receive a pension from work not covered by Social Security, but this likely doesn't apply to your situation. I recommend creating a my Social Security account at ssa.gov to see your earnings history and benefit estimates based on your actual record.

Thank you all for the helpful responses! I've learned so much: - It's 35 highest years, not 6 (big relief!) - I need to pay 15.3% self-employment tax and should make quarterly payments - At my FRA (67), there's no earnings limit - I might want to look into waiting until 70 to maximize benefits - I should open a Solo 401(k) or SEP IRA to reduce my overall tax burden I've created my SSA.gov account and am shocked to see my earnings record going back to my first job! I think I'll try that Claimyr service to ask specific questions about my situation. And definitely hiring an accountant before my first quarterly tax payment is due. Thanks again everyone - this has been incredibly helpful for a newbie like me!

Welcome to the self-employment world! I made the same transition 3 years ago and can share a few practical tips that helped me: 1) Open a separate business checking account immediately if you haven't already. This makes tracking income/expenses for Schedule SE much easier. 2) Set aside 25-30% of each payment you receive for taxes (not just the 15.3% SE tax, but also income tax). I use a high-yield savings account for this. 3) Consider paying quarterly estimated taxes to avoid a big surprise bill. The IRS has a safe harbor rule - if you pay 100% of last year's tax liability through estimated payments, you won't owe penalties even if you owe more at filing. 4) Keep detailed records of ALL business expenses - home office, internet, phone, equipment, etc. These reduce your net self-employment income, which reduces both your SE tax AND your income tax. One thing I wish I'd known earlier: you can actually contribute more to retirement accounts as self-employed than you could as a W-2 employee, which helps offset that higher tax burden. The Solo 401(k) limits for 2024 are $69,000 total ($76,500 if you're 50+). Good luck with the transition!