Self-employment tax is a combination of Social Security and Medicare taxes that self-employed individuals are responsible for paying. It is similar to the FICA taxes that employers withhold from employees’ paychecks, but self-employed individuals are responsible for paying both the employee and employer portions.
Who is Self-Employed?
The IRS considers you self-employed if you meet any of the following criteria:
- You carry on a trade or business as a sole proprietor or an independent contractor.
- You are a member of a partnership that carries on a trade or business.
- You are otherwise in business for yourself (including in a part-time business or as a gig worker).
How Much is Self-Employment Tax?
The self-employment tax rate is 15.3%, which is divided into two parts:
- 12.4% for Social Security
- 2.9% for Medicare
However, the Social Security portion only applies to the first $147,000 of your net self-employment income in 2022 ($160,200 in 2023). After that, you are not subject to Social Security tax on your self-employment income. There is no limit on the Medicare portion of self-employment tax.
How to Calculate Self-Employment Tax
To calculate your self-employment tax, you need to determine your net self-employment income. This is your business income minus your business expenses. Once you have your net self-employment income, you can calculate your self-employment tax using the following steps:
- Multiply your net self-employment income by 92.35% to account for the employer-paid portion of FICA taxes.
- Multiply the result by 15.3% to calculate your total self-employment tax.
Example
Let’s say you have a net self-employment income of $50,000 in 2022. Your self-employment tax would be calculated as follows:
- $50,000 x 92.35% = $46,175
- $46,175 x 15.3% = $7,043
When to Pay Self-Employment Tax
If you expect to owe $1,000 or more in self-employment tax, you are required to make estimated quarterly tax payments. The due dates for estimated tax payments are April 15, June 15, September 15, and January 15 of the following year.
Is Self-Employment Tax Deductible?
Yes, self-employment tax is deductible on your federal income tax return. You can deduct 50% of your self-employment tax bill from your adjusted gross income.
How to Reduce Self-Employment Tax
There are several ways to reduce your self-employment tax liability, including:
- Tracking all business expenses. Deductible business expenses reduce your net self-employment income, which in turn reduces your self-employment tax liability.
- Taking an above-the-line deduction for half of your self-employment tax. This deduction is available to self-employed individuals who file Schedule SE (Form 1040).
- Making an S-corp election. S corporations are taxed differently than sole proprietorships and partnerships, and S corp owners may be able to reduce their self-employment tax liability by electing to have their S corp taxed like a C corporation.
Self-employment tax is an important consideration for self-employed individuals. By understanding how to calculate and pay self-employment tax, you can ensure that you are meeting your tax obligations and minimizing your tax liability.
How The Self Employment Tax Works (And How You Can Avoid It!)
How much self-employment tax do you pay?
Only 92.35% of your total net earnings are subject to self-employment tax. This is known as your tax base. For example, let’s say you’re single and your 2022 self-employment net earnings come out to $50,000. Here’s how you’d calculate your self-employment taxes: Determine your self-employment tax base.
Do you pay self-employment tax if you work for a company?
If that seems like an eye-popping amount of self-employment tax (and it may, the less money you earn), keep in mind that if you work for a company and have Social Security tax withheld, your employer is paying a portion of that tax on your behalf. And the self-employment tax isn’t the only tax you’ll be paying.
How do I pay my self-employment tax?
As a self-employed individual, you may have to file Estimated Taxes quarterly. You can use these estimated tax payments to pay your self-employment tax. Refer to the Estimated Taxes page and Publication 505, Tax Withholding and Estimated Tax for more details on paying your self-employment tax with Estimated taxes.
How do you calculate self-employment tax?
Determine your self-employment tax base. Multiply your net earnings by 92.35% (0.9235) to get your tax base: $50,000 x 92.35% = $46,175 Calculate your self-employment tax. Multiply your tax base by the self-employed tax rate: $46,175 x 15.3% (0.153) = $7,064.78. There’s no additional Medicare tax because your net earnings fall under $200,000.