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Self-Employed? Make Sure You Plan Ahead for Medicare

Once you turn 65, you qualify for Medicare, a federal entitlement program that’s been around for over 50 years. While this program was created at a time when most people held traditional jobs, it’s not reserved for people whose taxes are tied to an employer. But as a self-employed person, you might wonder if you’ll someday qualify for so-called “premium-free Part A” or if that no-cost coverage is only available via a traditional work history. Good news: It’s entirely possible for you to qualify for premium-free Part A. Here are some things to keep in mind before you turn 65 and sign up for Medicare.

Self-Employment Taxes

Most American workers pay into Medicare through payroll taxes. They and their employers contribute equal amounts to the Social Security and Medicare funds every year. Each must pay 6.2 percent of the employee’s earnings in Social Security taxes and 1.45 percent of the earnings in Medicare tax.

Although self-employed people don’t have employers to chip in toward these funds, they’re still responsible for paying into Social Security and Medicare. Because there’s no employer to contribute half the amount, self-employed workers must pay the full 15.3 percent. This is called the self-employment tax, which you’ll be familiar with if you’ve been working on your own.

As a self-employed person with income, you’re contributing to Medicare just like all other American workers. If you contribute enough, you should be able to receive free Part A Medicare coverage once you turn 65. Before that time, though, there are a few things that you need to do in order to ensure that you’ll receive that benefit, including reporting your income and paying attention to your work credits.

Note: This is a general overview of payroll and self-employment taxes. Income caps and additional taxes apply at certain levels. Consult a tax professional for specifics on your tax responsibilities.

How to Report Your Income

At tax time every year, you’re responsible for reporting your income to the federal government. As you probably know, one reason for this is to make sure that you pay the correct amount of income tax. If you’re self-employed, you’ll also need to pay the self-employment tax.

But reporting income has an additional purpose. It shows whether you’ve made enough money that year to qualify for any work credits. This is the standard by which your benefits eligibility is verified once you reach Medicare age. To claim Social Security and receive free Part A when it’s time for your Medicare enrollment, you must have earned at least 40 credits during your lifetime. This can usually be obtained through just 10 years of work (non-continuous, meaning they don’t need to be 10 consecutive years).

Each year that you work, you will earn four work credits if your earnings meet or exceed the set level for the year. In 2023, the required income level is $6,560. In some instances, you may earn a few credits even if you make under the set income level for that year.

You must file Form 1040 and Schedule SE with the IRS each year. You may also need to file Schedule C or Schedule F depending on your situation. These forms are used to report your income to the government. It’s critical that you submit this paperwork even if you do not owe any income tax for the year. If you’re not sure whether you’re submitting the right forms, ask an accountant or tax professional who works with self-employed people specifically.

Check Your Work Credits

The number of work credits you’ve earned is used to calculate both your Social Security benefits and your eligibility to sign up for free Part A during Medicare enrollment. People with traditional jobs usually don’t have to worry about keeping up with their credits. The Social Security Administration issues notices about your current benefit levels once you reach age 50. To view your most recent Social Security Statement, you can create an online account on the Social Security website.

Statements show how many credits you’ve accumulated, and they include a section that specifies whether you’ve yet earned enough credits to qualify for Medicare. Check your Social Security Statement regularly to ensure that it matches up with your own records. Any discrepancies should be reported to the Social Security Administration.

If you’re nearing retirement but your statement shows that you haven’t yet worked enough to qualify for Medicare, you may need to supplement your regular income for a few years or consult a tax professional about a better method of reporting your earnings. Be proactive. Taking action before you turn 65 will ensure that you have enough credits to get Medicare Part A for free.

Paying Out of Pocket for Part A

If you haven’t earned 40 work credits, you won’t receive premium-free Part A at age 65. Instead, you’ll have to pay out of pocket for this coverage, and it can be pricey. In 2023, people who’ve earned between 30 and 39 work credits will pay $278 a month for Part A (that amount stays the same in 2024). Those who’ve earned less than 30 credits will pay the full cost of $506 a month ($505 in 2024).

Keep mind that although your Medicare taxes help fund the Medicare program, only Part A is premium free. The other portions of Medicare – Part B, Medicare Advantage and Medicare Part D (prescription drug coverage) – require premiums no matter how many work credits you’ve accumulated. Shop carefully during your initial Medicare enrollment period to find the plan that works best for you.