Q: How to Calculate Your Self-Employment Tax In 4 Simple Steps

How many times a month do you find yourself daydreaming about wandering into the land of self-employment?

While self-employment can provide the freedom and flexibility you yearn for, it also adds some tax complexity. A classic example? Something called the self-employment tax. The self-employment tax rate is around 15.3 percent in 2020; we’ll keep you posted as 2021 tax information is released.

In this article we’ll share the basics about self-employment tax: How it works, how to calculate your own, and, (spoiler alert!) how to deduct part of it. Now, you should always consult your tax professional for your tax matters, but this is a quick primer for the self-employed who want to self-educate.

Tax definitions at a glance

Tax definitions can be dizzying, so before we get into how to calculate your self-employment tax, we thought we’d pause for a quick refresher. For those of you who know your tax definitions, feel free to skip this section.

Federal Income Tax: This tax is calculated based on your taxable income, which includes your total income after any qualifying deductions.

State Income Tax: Similar to federal income tax but paid to the state where you reside and/or states you did business in depending on nexus. This tax is also calculated based on your total income, filing status, and personal exemptions.

Local Taxes: These are taxes vary and may be imposed at the city, county, or municipality level 

Payroll Tax: Employers and employees split the bill 50/50 for the Federal Insurance Contributions tax—better known as FICA tax—which is composed of Social Security and Medicare Taxes. 

Self-Employment Tax (SE Tax): This is also known as SECA Tax, which stands for Self-Employed Contributions Act. The SE tax is made up of two parts: Social Security and Medicare taxes, which is representative of the FICA taxes paid by employees and employers. 

What is self-employment tax?

Self-employment tax (SE tax) has two parts: Social Security and Medicare, which together take about 15.3 percent of your earnings. As a quick reminder, folks who work for themselves need to pay both income tax and self-employment tax because a sole-proprietor is both the employer and the employee, so get taxed from both ends.

Social Security and Medicare are like the salt and pepper of any federal tax dinner spread: they’re sprinkled on top of nearly every income earner’s tax contributions.

Whether you work for yourself or are a typical full-time employee who works at a company, you likely have to contribute towards Social Security and Medicare. A big difference, however, is that when you are paid wages as an employee, your employer splits the Social Security and Medicare taxes with you. When you’re self-employed, you’re responsible for the full 15.3 percent.

Now let’s give that salt and pepper an extra shake, as there’s a crucial change to know about every year.

How much is Social Security tax?

The Social Security tax rate in 2020 is 12.4 percent of your earnings. For the 2020 tax year (remember: tax filings for 2020 are due April 2021), you will pay Social Security taxes on earned income up to $137,700. This is a jump from the 2019 taxable maximum of $132,900.

Note that the $137,700 limit reflects all earned income, not just your self-employed income. This means that anything you earned above that $137,700 is not subject to Social Security Tax.

For instance, let’s say that in 2020 you earn $147,700—of which $100,000 was from your self-employment and $47,700  from a W-2. In total, your 2020 annual income is $10,000 over the maximum taxable income. In this scenario, you  wouldn’t be required to pay Social Security tax on that last $10,000. 

For those who plan in advance: at the time of writing, the taxable maximum for 2021 is $142,800. You may wish to keep an eye on the Social Security website. For those who are late to the tax party and still need to file for years gone by, you’ll find the historical taxable maximum thresholds listed by year on the Social Security website

And Medicare tax?

The Medicare withholding rate is 2.9 percent of earnings. There is no earnings limit for Medicare taxes.

However, the Additional Medicare tax of 0.9 percent kicks in for those of you with earned income over a certain threshold based on your filing status ($200,000 for single filers, $250,000 for married filing jointly, and $125,000 for married filing separately), which makes for a total of 3.8 percent Medicare tax due on your earned income over the applicable threshold.

We know, that’s a mouthful, so check out the IRS website for more information on the Additional Medicare tax.

Do I have to pay self-employment taxes?

Most likely, yes. In general, under IRS guidance you are considered self-employed if you are:

What if you’re paid wages as an employee, but also have a side hustle? Then you may be required to pay self-employment tax on the earnings of your side gig. In this case, you’ll most likely want to fill out the Long Schedule SE to ensure that the FICA taxes paid via your W-2 job are included in the calculation. In short: the Long Schedule SE should prevent you from overpaying SE taxes.

If your annual income was generated entirely through self-employment (i.e. you did not receive W-2), you’ll probably want to consider the Short Schedule SE, which is genuinely, incredibly, short. 

Is there fine print? You betcha! Below is the 2019 chart for reference. (The 2020 form isn’t out yet.)

Exceptions you should know about

There are exceptions to every rule, of course. For instance, some qualifying “passive activities” that generate revenue via your company may not be subject to SE tax. But beware: this is a tax complexity, so definitely check with your accountant. 

Similarly, you may be exempt from paying SE taxes if your net income from self-employment is less than $400. That said, you’ll find that the IRS offers the following wise reminder: “If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the Form 1040 and 1040-SR instructions (PDF).” Also, if you have more than one business that yields self-employment income, the IRS will probably require you to to calculate the aggregate net from all businesses listed on your Schedule SE. And one more important note: Since SE taxes are not withheld automatically during the year, many self-employed individuals are required to make estimated tax payments before year-end, if they have more than $1,000 of income and self-employment tax due when filing their tax return.

Check out the IRS’s write-up for more on estimated tax payments.

How do I calculate how much I owe for the self-employment tax?

Put your third-grade hat on: it’s time for some multiplication tables. But this time, with bigger (and weirder) numbers.

Step 1: Grab your handy 1040 Form.

Working for yourself, you’ll have to get nice and cozy with an individual income tax return, the Form 1040 and Schedule SE, which computes your self-employment tax. You won’t use this form to crunch the actual numbers, but we’ll show you where to record important calculations since you can deduct part of your SE taxes.

Step 2: Figure out the amount of your earnings that are actually taxable for the self-employment tax.

Let’s say your self-employment earnings were $100,000 for 2020. According to the IRS, most, but not all of your total earnings would be subject to the SE tax. To find out what’s taxable, multiply your earnings ($100,000) by .9235. In this case, it comes out to $92,350.

Why is 92.35 percent of your earnings taxable? Because that 7.65 percent deduction takes into account the employer-half of the FICA tax, which the business would be able to deduct if you were paid as an employee. 

Spoiler alert: That’s why you can deduct that amount as a self-employed individual.  

Simple time tracking that syncs with payroll.

Step 3: Calculate the amount you owe for self-employment taxes.

Next, simply multiply your self-employment taxable income ($92,350 in this case) by 15.3 percent, which equals $14,129.55.

Voila: that’s the total amount you owe for the SE tax. If you’ve got your 1040 Form handy, list that entire SE tax amount on the 1040 Form under “Other Taxes.”

Step 4: Report half of your self-employment tax as an adjustment

Here’s a bonus step: You can report half of your total SE tax as an adjustment to your gross income, which means you pay less income tax overall. The IRS considers this step to be the employer-equivalent portion of your self-employment tax.

So, back to our example: Divide your entire SE tax of $14,129.55 in half, which gives us $7,064.78. Report this number on your 1040 Form as an adjustment to your income.

And there you have it: The self-employment tax, in a nutshell. The next time you’re asked to pass the salt and pepper at a party, you’ll know that’s your cue to discuss everyone’s favorite dinner topic: Social Security and Medicare.

This post was originally published on November 1, 2019.

Comments

  • katya

    This is so far the best guide out there, simple and clear explanation. After hours of browsing the internet, I was finally able to figure out my quarterly payments. I wish you could also publish a guide how to calculate a missed due penalty payment. Thank you guys!

    Reply
    • Gusto Editors

      Katya, we’re so glad our guide could help you out in a pinch! And great suggestion about calculating due penalty payments. We’ll put that idea in our back pocket!

      Reply
  • Gracie

    Hi
    Thanks for the advice, one question regarding the example shown above. So your quarterly payments would be $7064.78./4? What about the federal tax?
    Thanks

    Reply
    • Gusto Editors

      Hi Gracie, federal taxes will vary based on a couple of factors. You can take a look at our article on federal income tax brackets and rates to learn more: https://gusto.com/blog/taxes/federal-income-tax-brackets-tax-rates

      Reply
    • Gracie

      Thanks for all the support. I read the article, and have a better idea of the amount I owe for my federal taxes. Now, when I calculate my quarterly payments ,do I take the self employment tax and add it with the federal income tax and divide it by 4?

      Thanks!!

      Gracie

      Reply
    • Gusto Editors

      Hi Gracie! We’d recommend talking to your CPA, as every person’s individual situation is different and may require a different approach.

      Reply
  • Antonia Marie

    The best most simplest instructions I’ve ever found after I don’t know how many online searches. Finally was able to clear up a lot of confusion for me. Thank you so much for your publication. -Antonia

    Reply
    • Gusto Editors

      Antonia, we appreciate the kind words! Please don’t hesitate to let us know if there’s a topic you’d like us to cover.

      Reply
  • Sascha

    Hello Gusto-Team,

    thank you for the great guide. I’m a self-employed professional poker player without a business structure. Does the calculation and the deduction of the 7.65% of my income still apply to me? Thank you!

    Reply
    • Gusto Editors

      Hi Sascha, thank you for reaching out! You’ll want to talk to your CPA, as they’ll be able to give you the best recommendation for your situation.

      Reply
  • GN

    By far, the most comprehensive, clear, easy to understand article and steps for how to calculate (and better understand) self-employment tax. Thank you!

    Reply

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