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 2019.

In this article we’ll share the basics about the 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.

Simple time tracking that syncs with payroll.

What is the self-employment tax?

The 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.

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 rely on your own income, 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 2019 is 12.4 percent of your earnings. In 2019, you will pay Social Security taxes on earned income up to $132,900. This is a jump from the 2018 rate of $128,400.

Note that the $132,900 limit reflects all earned income, not just your self-employed income. That means that anything you earned above that $132,900 is not subject to Social Security Tax.

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, or $250,000 for married filing jointly), 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.

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 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 2019. 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.  

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

There’s one more 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.

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

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