How much is Self-Employment Tax?
If you’re self-employed, this article will explain how much tax you owe, how to calculate your deductions and strategies to manage your tax liability effectively.
Who has to pay self-employment tax?
In the United States, self-employment tax is a tax that any self-employed person must pay to fund Social Security and Medicare. It's similar to the Federal Insurance Contributions Act (FICA) taxes withheld from the pay of most wage earners. It helps those who are self-employed build credit toward Social Security and Medicare coverage.
If you’re self-employed, you pay self-employment tax on your net earnings. Your net earnings, sometimes called profit, are calculated by subtracting your business expenses from your total income.
Self-employment tax differs from income tax as the IRS views anyone self-employed as both the employer and employee. The following table summarizes the key differences between the two taxes:
Key Differences between Income Tax and Self-Employment Tax
| Income Tax | Self-Employment Tax |
|---|---|
| Income Tax | Self-Employment Tax |
| Everyone, including employees and self-employed individuals, must pay income tax. | This tax is specific to people who work for themselves, e.g., freelancers or business owners. |
| The tax applies to your overall earnings, including your job, investments, and other income sources. | Self-employed individuals must pay both income tax and self-employment tax. |
| According to the IRS, income tax rates vary based on how much you earn, i.e., your income bracket. | It covers the total amount for Social Security and Medicare taxes, which are usually split between employers and employees. |
So, how much is self-employment tax? The 2023 self-employment tax rate is 15.3% of your net earnings. This tax is divided into two parts, as follows:
12.4% for Social Security: This portion applies to your net earnings up to a limit of $160,200 for the 2023 tax year and $168,600 for the 2024 tax year.
2.9% for Medicare: This portion applies to all your net earnings, with no income limit. Suppose your net earnings exceed $200,000 as an individual filer (or $250,000 for married couples filing jointly). In that case, you might also be subject to an additional 0.9% Medicare tax on the excess earnings.
It is important to note that tax laws and rates can change, so it's recommended to check the latest information from the IRS or consult with a financial advisor to get the most up-to-date and accurate details regarding your self-employment tax for the current year.
Who has to pay self-employment tax?
Anyone who is self-employed must pay self-employment tax if they fall within a certain earnings bracket. This includes:
Freelancers
Small business owners
Independent contractors
People who work for themselves in various capacities, including side hustles.
Certain rules apply to specific professions, such as ministers. Still, anyone earning an income from self-employment is subject to self-employment tax.
The IRS stipulates the following minimum annual income amounts for those obligated to pay this tax:
People with net yearly earnings of $400 or more
People in ministry with an annual net income of $108.28 or more
If you are self-employed and earn below these minimum income amounts, you are not liable to pay self-employment tax. However, you remain accountable for income tax.
How is self-employment tax calculated?
Self-employment tax is calculated on your profits from self-employment. You can determine your estimated return amount using the self-employment tax calculator on the applicable IRS filing documents.
You can calculate and pay your tax in the following way:
Calculate your net earnings – Start by figuring out how much money you make annually from your self-employed work. This includes all your earnings from your business minus any allowable business expenses. These expenses could include materials costs, contract employees compensation, office space, or equipment. After you've subtracted your allowable business expenses from your gross (total) earnings, you get your net earnings.
Calculate the Social Security tax – Social Security tax is 12.4% of your net income up to a threshold of $160,200. To calculate the Social Security tax amount, you must multiply your net income by 12.4% if it is less than the threshold amount.
Calculate the Medicare tax – Medicare tax is 2.9% of your net income and is not subject to a threshold. To calculate Medicare tax, multiply your entire net income by 2.9%.
Calculate additional Medicare tax, if applicable – Suppose your net earnings exceed $200,000 (as an individual filer) or $250,000 (as a married couple filing jointly). In that case, you might be obliged to pay the additional 0.9% Medicare tax on your excess earnings.
Add the tax amounts – Once you've calculated the relevant tax amounts, add them to ascertain your total self-employment tax rate.
Pay the tax to the IRS – Pay the self-employment tax directly to the IRS using one of their accepted payment methods or platforms. Payment methods include Direct Pay, credit or debit card, or digital wallet.
The IRS requires you to pay your annual tax amount in four estimated amounts, i.e., each quarter. This eases the burden of paying one lump sum annually. Failure to pay self-employment tax each quarter may result in a penalty.
Below are two examples of how to calculate self-employment tax using the outlined steps:
Example 1:
Step 1: Calculate net income
Net Income = $50,000
Step 2: Calculate Social Security tax (Remember: the net income threshold for this calculation is $160,200)
Net Income x 12.4% = Social Security tax
$50,000 x 12.4% = $6,200
Step 3: Calculate Medicare tax
Net income x 2.9% = Medicare tax
$50,000 x 2.9% = $1,450
Step 4: Calculate additional Medicare tax to excess earnings (if applicable)
Not applicable
Step 5: Calculate the total Self-Employment tax amount
Social Security tax + Medicare tax + additional Medicare tax = Self-Employment tax
$6,200 + $1,450 + $0 = $7,650
Example 2:
Step 1: Calculate net income
Net Income = $250,000
Step 2: Calculate Social Security tax (Remember: the net income threshold for this calculation is $160,200)
Net Income x 12.4% = Social Security tax
$160,200 x 12.4% = $19,864.80
Step 3: Calculate Medicare tax
Net income x 2.9% = Medicare tax
$250,000 x 2.9% = $7,250
Step 4: Calculate additional Medicare tax to excess earnings (if applicable)
Calculate excess earnings:
Net income - $200,000 = excess earnings
$250,000 - $200,000 = $50,000
Calculate additional Medicare tax:
Excess earnings ($) x 0.9% = additional Medicare tax
$50,000 x 0.9% = $450
Step 5: Calculate the total Self-Employment tax amount
Social Security tax + Medicare tax + additional Medicare tax = Self-Employment tax
$19,864.80 + $7,250 + $450 = $27,564.80
Remember to keep detailed records of your earnings and expenses to calculate your net profits and fulfill your tax obligations accurately. If you need help with how to calculate your self-employment tax, it’s recommended you consult with a registered financial adviser. Get matched with an Unbiased adviser here.
What can I write off on my taxes if I’m self-employed?
You can lower your tax contribution with the following tax deductions for self-employed individuals or couples:
Self-employment health insurance tax deduction.
Self-employed tax deductions, which apply only to your income tax.
Before applying for self-employed tax deductions, you must check if you are eligible for the Earned Income Tax Credit (EITC).
How to file self-employment taxes?
If you’re self-employed, you don't have an employer to withhold your taxes on your behalf. So, to file self-employment taxes, you can use Form 1040-ES, which will help you figure out your quarterly estimated tax returns if you are filing as an individual. You will, however, need your annual tax return from the prior year to calculate the estimates.
To file your annual tax return, you must use a Schedule C to report your income or losses. With the calculations from Schedule C, you can evaluate how much your annual Social Security and Medicare contributions should have been for the tax year. You should file this information using Schedule SE (Form 1040 or 1040-SR ), Self-Employment Tax.
The bottom line
Calculating self-employment tax involves determining your net income by subtracting your allowable business expenses from your total earnings. Then, you calculate Social Security tax (12.4% of your net income up to a threshold) and Medicare tax (2.9% of your entire net income). You may be liable for an additional 0.9% Medicare tax on the excess earnings if your income exceeds specific thresholds.
Health insurance and self-employed tax deductions can reduce your overall tax liability. It's strongly recommended you keep meticulous records of your income and business-related expenses to make accurate calculations. Additionally, staying informed about tax laws and consulting with an adviser can ensure you take advantage of available deductions when you file self-employment taxes.
Unbiased can help you find an SEC-regulated financial advisor well-versed in self-employment matters. They can help manage our tax needs and help you get your tax returns done right. Find your financial advisor here.
Senior Content Writer
Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.