Deductions

• In order to reduce a self-employed individual's tax burden, there are two deductions available. If a self-employed person files an IRS Form 1040, half of the Social Security tax can be deducted from the gross income when calculating adjusted gross income. In addition, a self-employed individual can take the net earnings from being self-employed and reduce that figure by half of the total Social Security tax, which was 15.3 percent on income up to $106,800 as of 2010.
  
  

Family businesses

• If a husband and wife own a business, each of them needs to fill out an IRS Schedule SE form, reporting the share of the profits each earned. This needs to be done even if the husband and wife are filing a joint return. The same holds true for all family members.
  
  

Work credits

• Self-employed individuals working and paying Social Security taxes earn work credits each year, up to a maximum of four. Before 1978, credits were worked out quarterly, and after 1978, credits were worked out annually. Each year, the amount needed to earn a credit changes. Most people reach the maximum amount needed early in the year, and the work credits do not affect the amount of benefits an individual receives upon collecting Social Security. The average earnings over a self-employed individual's working lifetime are the basis of the monthly payment.
  
  

Monthly payments

• To determine the average earnings for a working lifetime, the Social Security Administration takes the 35 years of earnings that were highest. However, if there are years in which there are low earnings or even no earnings, those years can be used to reach 35 years. This figure is used to determine the monthly payment paid out over the course of a self-employed individual's retirement. The monthly payment can vary depending upon the age when a person retires. Individuals who retire early receive lower monthly payments than those who wait until they reach maximum retirement age.