When you make the transition to being a self employed business owner, you're responsible for self-employment tax. But before the thought of another tax responsibility starts stressing you out, we've simplified everything you need to know about calculating, filing, and paying your self-employment taxes. Or if you just want help calculating, check out our free self-employment tax calculator.
Self-employment tax (or SE tax) is the Social Security and Medicare tax (health insurance) paid by self-employed individuals. It's similar to the FICA tax that employers withhold from their employees' paychecks as payroll taxes. Except no one will deduct it from your pay—business owners are responsible for paying their own self-employment taxes.
Every self-employed person has to pay self-employment taxes on their self-employment earnings of $400 or more. This applies to anyone who is defined as self-employed, even if you're a senior currently receiving Social Security benefits. The IRS considers you to be self-employed if you are a freelancer, independent contractor, or if you have your own business (sole proprietorship or partnership).
The self-employment tax rate is 15.3%, with 12.4% for Social Security and 2.9% for Medicare. However, the Social Security portion may only apply to a part of your business income. That's because of the Social Security wage base.
For 2022, the Social Security wage base is $147,000 and increases to $160,200 in 2023. This means that in 2022, Social Security tax only applies to the first $147,000 of your earned income from wages and self-employment. After that, you aren't charged any additional Social Security tax. There is no limit on the Medicare portion of self-employment tax. So no matter how much you earn, the Medicare tax applies to all of your wages and self-employment income.
For example, say you have a full-time job earning $150,000 for the tax year. You also have a side hustle making custom party cakes that brings in an additional $20,000 per year. In 2022, your employer withholds Social Security taxes on $147,000 of your wages. Since you've already reached the Social Security wage base, you wouldn't have to pay the 12.4% Social Security portion of self-employment taxes on your side hustle income. You'd only have to pay the 2.9% Medicare portion of self-employment tax.
High-earning tax filers are also responsible for paying an additional Medicare tax of 0.9% on income above the following thresholds, depending on their filing status:
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To calculate your self-employment tax, start by finding your net earnings from self-employment. You can calculate your net earnings for tax purposes by subtracting your business expenses from business income. This is generally done by filling out a Schedule C as part of IRS Form 1040, your federal income tax return. Schedule C must be completed by sole proprietors, independent contractors, and other small business owners as part of their tax filing.
If the result is less than the Social Security wage base, the calculation is simple. If your net earnings are more than the Social Security wage base, your calculation will have a few additional steps. You can use our free self-employment tax calculator otherwise we'll show you how to calculate your tax either way.
1. Figure out your net earnings subject to self-employment tax.
Let's say your net income from self-employment in 2022 is $100,000. To find the taxable amount, multiply $100,000 by 92.35%. Why 92.35%? Because the 7.65% deduction takes into account the employer-half of your FICA taxes, which the business would deduct if you were paid as an employee.
$100,000 x .9235 = $92,350
2. Calculate your self-employment taxes.
Next, multiply your self-employment taxable income by the 15.3% self-employment tax rate.
$92,350 x .153 = $14,130
Your self-employment taxes are $14,130. We've rounded the result because the IRS gives you the option of rounding off cents to whole dollars on your tax return and schedules.
Further reading: How to Calculate Net Income (Formula and Examples)
1. Figure out your net earnings subject to self-employment tax.
Let's say your net earnings from self-employment were $150,000 for 2022. Only $147,000 of your earnings are subject to Social Security taxes, so we have to add an extra step in the calculation.
2. Calculate your self-employment taxes.
Next, multiply your taxable self-employment earnings by the individual rates for Social Security (12.4%) and Medicare (2.9%).
Total self-employment tax: $18,228 + $4,017 = $22,245
If your self-employment income is $400 or more during the year, you are required to pay self-employment taxes and file Schedule SE with your Form 1040, which is generally due by April 15. However, if you expect to owe $1,000 or more in combined income tax and self-employment taxes, you'll need to make estimated quarterly tax payments.
Estimated payments due dates are typically April 15, June 15, September 15, and January 15 of the following year. Those dates shift to the next business day if the 15 falls on a weekend or holiday.
Self-employed taxpayers can estimate the amount they need to pay using the worksheet on page 8 of Form 1040-ES. These tax forms will help you determine the amount you'll owe for the year, divide it by four, and pay in equal installments by the due dates mentioned above. The form also includes vouchers to include when mailing your payment. If you prefer to pay online using IRS Direct Pay, you won't need a voucher (or a stamp).
When you pay self-employment taxes, you actually get a tax deduction for your federal income tax filing. You can deduct 50% of your self-employment tax bill from your adjusted gross income and decrease the amount of taxes you owe. For example, if you calculate your self-employment taxes to be $2,000, you get a tax deduction of $1,000 of your taxable income. Depending on your tax bracket, this would save you between $100 and $370 on your tax bill.
Many new business owners cringe at the idea of paying an additional 15.3% of their hard-earned cash into self-employment taxes. The good news is, there are ways to reduce your business tax bill.
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