Why Freelancers in Nine States Pay Double Social Security Tax for Nothing

There's a particular kind of financial insult that happens when you're self-employed, and it's not the one people talk about at parties when they discover you don't get paid time off or employer-matched retirement contributions. Those are obvious — the visible costs of working for yourself that everyone nods knowingly about before changing the subject. No, the real insult is subtler and substantially weirder: if you're a freelancer living in Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, or West Virginia, you're paying double Social Security tax on money that will eventually be taxed again when you receive it as a benefit.

Actually, I lied. That's twelve states, not nine. But the number keeps changing as state legislatures tinker with their tax codes, and by the time you read this, one or two might have dropped off the list or a new one might have joined. The point stands regardless: there's a cluster of states where the tax treatment of Social Security creates a closed loop of taxation that applies uniquely to freelancers and self-employed people, and almost nobody talks about it because it requires understanding three different tax systems simultaneously, which is precisely the kind of thing that makes people's eyes glaze over at dinner parties.

Let me back up. When you work for an employer, you pay 6.2% of your wages into Social Security (up to the annual wage cap, which is $176,100 in 2026), and your employer matches it with another 6.2%. When you're self-employed, you pay both halves — the full 12.4% — because you are both the employee and the employer. This is called self-employment tax, and it's the reason freelancers often feel like they're being punished for not having a boss. The IRS does allow you to deduct half of your self-employment tax when calculating your adjusted gross income, which is supposed to simulate the employer's portion being invisible to you, but it's not really the same. You're still writing the check for the full amount.

Now, the theory behind Social Security taxation is straightforward enough: you pay in during your working years, and when you retire, you receive monthly benefits calculated from your lifetime earnings. The money you paid in was never taxed as income to you when you received it as wages — it was deducted from your paycheck before you ever saw it — so taxing the benefits you receive later is, theoretically, the government's first crack at that money. Except that's not quite right either, because the contributions you made were calculated on post-income-tax wages. You paid income tax on your $50,000 salary, and then Social Security tax was calculated on that same $50,000. So really, you've already paid income tax on the money, and Social Security tax is an additional thing, a separate line item that funds a specific future benefit.

But here's where it gets strange. The federal government, as of 1983, started taxing Social Security benefits for higher earners. If your combined income (adjusted gross income plus nontaxable interest plus half of your Social Security benefits) exceeds certain thresholds — $25,000 for single filers, $32,000 for married couples filing jointly — up to 85% of your benefits become subject to federal income tax. The justification is that you never paid income tax on your employer's matching contribution, so the government is finally collecting on that portion. It's a bit of a shell game, but fine, whatever. Most people accept that once you're pulling in enough retirement income to trigger those thresholds, you can afford to pay some tax on your benefits.

The twelve states I mentioned earlier, though, take this a step further. They tax Social Security benefits at the state level too. Not all benefits, necessarily — most of these states have their own thresholds and exemptions, and some only tax benefits for people above certain income levels — but they do tax them. And this is where the double taxation comes in for freelancers.

When you're self-employed, you paid the full 12.4% self-employment tax yourself. Not half. All of it. There was no employer contribution to exclude from your taxable income, because you were the employer. You paid income tax on your freelance earnings, then you paid self-employment tax on those same earnings (minus half, for the deduction), and now, decades later, you're paying state income tax on the Social Security benefits funded by the contributions you made with money that was already taxed twice.

Let's say you earned $60,000 as a freelancer in Colorado in 2000. You paid federal income tax on that $60,000. You also paid $7,446 in self-employment tax (12.4% of $60,000, minus the half that's deductible for income tax purposes, but you still wrote the full check). Fast forward to 2026, and you're retired in Colorado, receiving Social Security benefits. Colorado taxes Social Security benefits for single filers with federal adjusted gross income over $75,000. If you're above that threshold, you're now paying Colorado state income tax on benefits that were funded by contributions you made with money that Colorado already taxed when you earned it, and that the federal government already taxed via self-employment tax, which is really just Social Security and Medicare tax wearing a trench coat.

The traditional employee doesn't experience this loop the same way. Their employer paid half the Social Security tax, and that half was never included in the employee's taxable income in the first place. So when states tax Social Security benefits, they're arguably taxing money that wasn't fully taxed on the way in. For freelancers, though, the money was definitely taxed on the way in — all of it, both halves, because there was no employer to invisibly shoulder the cost.

And before you say "but wait, doesn't the self-employment tax deduction fix this?" — no, not really. The deduction lets you exclude half of your self-employment tax from your adjusted gross income, which lowers your income tax bill slightly, but it doesn't change the fact that you paid the full 12.4%. It's a partial rebate, not a reimbursement. You're still out the full amount, and the deduction is worth, at most, your marginal tax rate times half of the 12.4%. If you're in the 24% federal bracket, the deduction saves you about 1.5% of your self-employment income. You still paid the other 10.9% out of pocket.

The weirdness compounds when you realize that some of these twelve states — Vermont and Minnesota, for instance — have relatively high state income tax rates to begin with. So you're paying a high rate on your freelance income, then self-employment tax on top of that, then decades later a high rate on your Social Security benefits, which creates a kind of tax sandwich where the same dollar is taxed on the way in, taxed again as a contribution, and taxed a third time on the way out. It's the financial equivalent of being charged a cover charge to enter a bar, then being charged again for each drink, and then being charged a coat-check fee on your way out even though you never checked a coat.

There are nine states, by the way, that don't have state income tax at all — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming (New Hampshire technically has one, but it only applies to dividends and interest, and it's being phased out). If you're a freelancer in one of those states, you avoid this entire problem by default. You pay federal income tax, you pay self-employment tax, and when you retire, your Social Security benefits are only subject to federal taxation if your income is high enough. No state-level triple-dip.

The rest of the states — the 29 or so that do have income tax but don't tax Social Security benefits — treat the benefits as exempt, which means freelancers in those states pay the double tax on the way in (income tax plus self-employment tax) but get a pass on the way out. This feels closer to fair, or at least closer to neutral, because it acknowledges that Social Security contributions were made with after-tax money and shouldn't be taxed again when they're returned as benefits.

But in these twelve states, freelancers get the worst of both worlds. And the thing is, it's not like this is some dark secret or loophole. It's just how the tax systems stack when you layer federal self-employment rules on top of state income tax rules on top of state-level Social Security benefit taxation. Nobody designed it to specifically screw over freelancers. It's more like three separate policy decisions that, when combined, create an outcome that nobody intended but also nobody has bothered to fix.

I built the SalaryHog calculator partly to figure out stuff like this — to see what actually happens to your take-home pay when you account for all the layers of taxation that apply in different states and different employment situations. And one thing that jumps out when you model freelance income across states is how much the self-employment tax distorts the picture. It's not just 12.4% on top of your income tax. It's 12.4% that you can't escape, that doesn't vary by state, and that you'll eventually see taxed again if you happen to retire in the wrong place.

The obvious counterargument here is that Social Security benefits are progressive — lower earners get a higher replacement rate than higher earners — so even if you're taxed multiple times on the same money, you're still coming out ahead in the long run if you earned a modest income. And sure, maybe. But that's a justification for the benefit formula, not for the triple taxation. You can have a progressive benefit structure without taxing the same dollar three times. Plenty of states manage it.

There's also the argument that state taxation of Social Security benefits is relatively rare and relatively modest, and that most people who get hit by it are affluent retirees who can afford it. And again, maybe. But "most people" isn't "all people," and the fact that something affects a minority doesn't make it less weird or less worth examining. Freelancers already deal with a ton of financial friction that traditional employees don't — quarterly estimated tax payments, self-funded health insurance, no unemployment insurance, the constant psychological weight of irregular income. Adding a deferred triple-tax to the list feels less like sound policy and more like an oversight that nobody's gotten around to cleaning up.

The thing that really gets me, though, is that this entire issue is invisible until you're about thirty years downstream from the initial tax event. When you're a freelancer in your thirties paying self-employment tax, you're not thinking about whether your state will tax your Social Security benefits in 2056. You're thinking about the current quarter's estimated payment and whether you should upgrade to a better health insurance plan. The double taxation happens silently, in the gap between contributing and receiving, and by the time you notice it, you've been living in that state for decades and you're not about to move just to avoid a few percentage points of tax on benefits you haven't even started collecting yet.

But if you're a freelancer deciding where to live right now, in 2026, and you're thinking long-term about tax efficiency, this is one of those factors that doesn't show up on the "best states for freelancers" listicles but probably should. Because it's not just about your current tax rate or your current cost of living. It's about whether the state you're in is going to take a third bite of the same dollar when you're seventy.