What is self-employment tax?

Self-employment tax is a tax on individuals who work for themselves, including freelancers, contractors, and small business owners. It fulfills their requirement to pay into Social Security and Medicare. It’s similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. 

As a self-employed individual, you’re both the employer and the employee, meaning you must pay all these taxes yourself. Self-employment tax is calculated based on your net earnings from self-employment, including income from any trade or business you operate and certain other forms of income. This system ensures that everyone, regardless of their employment status, contributes to Social Security and Medicare in a fair and equitable manner.

How much is the self-employment tax?

The current self-employment tax rate is 15.3%, including Social Security and Medicare taxes. However, this rate only applies to the first $132,900 income earned annually. Any additional income above that amount is subject to a 2.9% Medicare tax.

The self-employment tax rate is 15.3% and consists of two parts:

  1. Social Security tax: The Social Security tax rate for self-employed individuals is 12.4% on net earnings up to the Social Security wage base, which is $160,200 for 2023. 
  2. Medicare tax: The Medicare tax rate for self-employed individuals is 2.9% on all net earnings. 

For high-income earners, there is an Additional Medicare Tax of 0.9% on earnings over certain thresholds: 

  • Married filing jointly: $250,000
  • Married filing separate: $125,000
  • Single: $200,000
  • Head of household (with qualifying person): $200,000
  • Qualifying surviving spouse with dependent child: $200,000

How to calculate the self-employment tax

To calculate your self-employment tax, you must report your income and expenses on Schedule C or Schedule C-EZ of your tax return. The amount subject to self-employment tax will be calculated and added to your overall tax liability.

To calculate self-employment tax, follow these steps:

  1. Determine your net earnings from self-employment: Subtract your deductible business expenses from your gross self-employment income to find your net earnings. This includes income from any trade or business you operate and certain other forms of income.
  2. Calculate the Social Security tax: Multiply your net earnings from self-employment by 12.4%. However, if your net earnings exceed the Social Security wage base ($160,200 for 2023), only the portion up to the wage base is subject to Social Security tax.
  3. Calculate the Medicare tax: Multiply your net earnings from self-employment by 2.9%. There is no earnings limit for Medicare tax.
  4. Calculate the Additional Medicare Tax (if applicable): If your net earnings exceed certain thresholds ($200,000 for single filers, $250,000 for married couples filing jointly, and $125,000 for married couples filing separately), multiply the excess earnings by 0.9%.
  5. Add: Combine the Social Security, Medicare, and Additional Medicare Tax (if applicable) together to find your total self-employment tax liability.

Remember to consider any deductions or credits you may be eligible for to reduce your self-employment tax liability. It’s also crucial to keep accurate records of your income and expenses for tax reporting purposes. Consult a tax professional for assistance if you need help calculating your self-employment tax.

Self-employment tax formula

Total self-employment tax = (Net earnings × 12.4%) + (Net earnings × 2.9%) + (Excess earnings subject to Additional Medicare Tax × 0.9%)

How to pay the self-employment tax

You typically pay self-employment taxes throughout the year through estimated quarterly tax payments. Payments are due in April, June, September, and January. You can make your quarterly payments online or by mail using Form 1040-ES. Finally, keep records of payments for tax filing and documentation purposes.

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