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Self Employment Tax Guide

by Ryan Guina

Most people who work for an employer have their taxes automatically withheld from their paycheck. This makes life much easier when it comes time to file taxes because you don’t need to worry about filing estimated taxes or sending in any paperwork. You just wait for your W-2 to arrive in January, then you file your taxes with the IRS.

The taxes your employer withholds from your paycheck cover your income taxes and your FICA (Federal Insurance Contributions Act) taxes: Social Security tax and Medicare tax. Your employer is also nice enough to pick up half the bill for those two programs (OK, they are required to, otherwise they probably wouldn’t!).

who has to pay self-employment taxes?However, if you have self employment income, you are subject to SECA tax (Self-Employment Contributions Act), which is similar to FICA taxes. That means your are on the hook for the entire Social Security and Medicare tax bill. Why? Because when you are self employed, you are basically the employer and the employee and you don’t have someone paying your half of the tax bill.

Who has to pay self employment tax?

The IRS considers you self employed if you are a sole proprietor, an independent contractor, a partner in a partnership, a member of a single-member LLC or are otherwise in business for yourself. You generally have to pay self employment tax if you earn more than $400 of self-employment income, or earn more than $108.28 as a church employee. Basically, you are required to pay self employment tax if you work for yourself and someone else does not pay your tax Social Security or Medicare tax.

How much is self employment tax?

The self employment tax rate is 15.3%, and consists of two parts: 12.4% for Social Security and 2.9% for Medicare.

  • Social Security Tax. Only your first $106,800 of combined wages, tips, and net earnings is subjected to the 12.4% Social Security tax.
  • Medicare Tax. All income is subjected to the 2.9% Medicare tax.

You can calculate your self-employment tax on Schedule SE (Form 1040), or with a commercial tax software program such as TurboTax or TaxCut.

Easy self employment tax formula. Social Security taxes are only assessed on incomes of $106,800 and less, so if you fall under that threshold, simply multiply your income by 15.3% (12.4% + 2.9%). If your income is greater than $106,800, multiply your income by 2.9% (to cover your Medicare tax), and add $13,243.20 (max Social Security tax).

How to pay self employment taxes

You will report your self employment taxes in the “Other Taxes” section of Form 1040 when you file your tax return at the end of the year. However, depending on how much you earn, you may need to pay estimated taxes to make sure you are within IRS rules – or you may be subject to underpayment penalties.

Additional self employment tax tips

Self-employment tax deduction. You can deduct half of your self employment tax before applying the tax rate when calculating the amount of self employment tax you owe. For example, if you earn $100,000 from self-employment, you report that amount as income on Form 1040. However, you can deduct 7.65% from that number when figuring how much self employment tax to pay. Thus, you will only pay self employment taxes on $92,350, saving you $1,170 on self employment tax ($7,650 x 15.3%). This deduction is available whether or not you itemize.

Self employment tax is in addition to regular income taxes. When you are doing your tax planning, don’t forget to consider your normal tax rates. You will be required to pay your normal state and federal income tax in addition to self employment tax.

Consider hiring a professional

I’m a big believer in doing things myself. However, taxes are one time when I am not afraid to spend some money for the peace of mind to know that everything was done correctly and I have maximized my return or minimized my tax bill. This information is intended as a resource only and I recommend consulting with an account or IRS documentation for information specific to your needs.

Additional IRS Resources:

Photo credit: DonkeyHotey


Published or updated January 2, 2013.
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{ 10 comments… read them below or add one }

1 Emily @ Under$1000PerMonth

As a financial junkie, I love doing my taxes myself. When I became self-employed, it became infinitely more exciting, going through various tax laws and applicable deductions. If you’re inexperienced, it may not be a good idea, but taxes are fun, if you like doing that kind of thing. And the IRS has a helpline that actually is helpful.

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2 Ryan

Emily, I can see how some people enjoy it. But for others, it becomes a matter of calculating the value of their time. Learning the laws and regs is time consuming, and for some people it is better spent working on their business or spending with their family. I prefer to outsource the tasks for something like this. But each situation is different. :)

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3 James from FaceySpacey.com

Yea but the truth of the matter is nobody cares more about your money and what you lose in taxes than you do. So the greatest accountant will even miss things that you would if you did all your homework. It’s really so frickin easy to do this, and construed to be so complicated so CPAs have jobs. Everybody should just master this via 80 hours of their time.

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4 Jack

Thanks for the post and explanation – very concise and helpful. I’m recently self-employed and, as you recommended, got the help of a professional. I haven’t gotten his fee yet, but already I’m pretty sure he’s paying for himself. He even caught some costly errors on my 2008 return (which I did myself, foolishly).

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5 Ryan

Jack, my CPA service more than pays for itself… and saves me hours of computing taxes. A win-win situation in my book. :-)

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6 ChristianPF

Ryan,
great analysis – a couple years ago, I would have had no interest in this article, but now I find stuff like this very valuable – funny how things change!

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7 Ryan

I’m in the same boat! And last year I would have tried to do it all myself, and this year I’ll just hand my taxes off. It’s easier and more efficient that way! :-)

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8 Curious Cat Investing Blog

I like reminding people social security and medicare taxes are twice as high as their paystubs show. Even when people only see half of the tax on their paystub they can’t help but think it is questionable tht such a huge amount of tax should go to this system. It seems obvious the scope of social security needs to be returned to the something closer to scope it began with. As life expectancy rates have increase by over 20 years social security has not been adjusted to reflect this reality. instead taxes have been substantially increased over and over to expand the scope of social security.

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9 Dan

Cat,

Let’s start by privatizing Social Security. A brilliant idea brought up a few years back but was unfortunately shot down by Congress.

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10 fredct

Privatizing Social Security has the distinct problem of treating SS like something it is not. It is not a long term investment where money is put aside for you for later. Your SS money goes to pay benefits of current retirees. Your benefits will be paid by the workers of the future.

The major major problem with privatizing (besides wondering what happens if the market falters) is where do you get the money to pay current retirees benefits if current contributions are being siphoned off to private accounts? I’ve yet to hear a good answer to that fundamental question.

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