The Side-Hustle Tax Shock: Why Self-Employed Retirees Pay Both Halves of Social Security Tax
Many retirees don’t completely retire. Instead, they pick up side hustles like consulting to supplement their Social Security checks and savings.
There are many side gig options for a retiree, from pet sitting to consulting to freelance writing work. But that extra work can result in surprise taxes because of how the IRS treats self-employment income.
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Why retirees with side hustles owe self-employment tax
Money you earn from many side hustles, including driving for apps like Uber, are generally treated as self-employment income. Workers who earn $400 or more of net earnings from self-employment must report those earnings on Schedule SE with their federal return. It even applies to people who are already collecting Social Security benefits.
The key distinction is that self-employed workers are responsible for paying both the taxes an employer would and employee taxes. At a W-2 job, you pay half of Social Security and Medicare payroll taxes through paycheck withholding and your employer pays the other half.
You only need to pay Social Security taxes on what’s considered “earned income.” Pension payments, annuities, and interest or dividends from savings and investments aren’t subject to Social Security taxes (though income tax still applies). You can still use deductions to minimize how much you pay in self-employment taxes, but you are responsible for both the employer and employee portions of Social Security and Medicare taxes.
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Why the tax bill feels so high
The tax rate for W-2 employees is 6.2% for Social Security and 1.45% for Medicare, while employers withhold the same amount from their paychecks for remaining taxes. However, self-employed workers are responsible for the employer’s tax portion as well, since there is no employer who is withholding a portion of their earnings.
Generally, self-employed workers pay a 12.4% Social Security tax and 2.9% Medicare tax on their net earnings from self-employment, after the IRS adjustment used to calculate the self-employment tax. Every dollar you earn above the $184,500 threshold in 2026 is no longer subject to Social Security taxes. The same limit doesn’t apply to Medicare taxes, and high earners may owe an additional 0.9% Medicare tax when net earnings exceed $200,000 for single filers or $250,000 for married couples filing jointly.
The deductions that can soften the tax shock
Any documented, necessary and ordinary business expenses can reduce how much you owe on taxes. If you earn $30,000 from your side hustle and have $10,000 in deductible expenses, your net earnings can come down to $20,000.
You can still claim the standard deduction even if you deduct business expenses. Plus, taxpayers can deduct half of their self-employment tax on Form 1040 when calculating adjusted gross income. This can lower your taxable income and which could lower your state and federal income taxes.
You can also pay taxes quarterly, so you don’t have to pay the entire amount in April. Breaking it down into smaller quarterly payments can make it more manageable and can help you avoid penalties.