Self Employment Tax Guide – What You Need to Know to Avoid Costly Penalties!

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who has to pay self-employment taxes?
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…

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!).

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 you are on the hook for the entire Social Security and Medicare tax bill.

Why? Because when you are self-employed, you are 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. Remember, self-employed individuals pay both parts of the Social Security tax, which is 12.4%. The Social Security portion of the self-employment tax is split evenly between the employer and the employee, so they both pay 6.2% of the pay, up to the annual up to the annual Social Security income tax limit.

A non-self-employed individual would have to pay FICA taxes equivalent to 9.1% of their pay (6.2% for Social Security, and 2.9% for Medicare), up to the annual Social Security income tax limit.

  • Social Security Tax. Only your first $128,700 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 H&R Block Online.

Easy self-employment tax formula. Social Security taxes are only assessed on incomes of $128,700 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 $128,700, multiply your income by 2.9% (to cover your Medicare tax), and add $15,958.80 (max Social Security tax in 2018).

*Note: These are the income caps for the 2018 tax year and are subject to change on an annual basis. You can see the historic income caps for social security tax here.

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.

This is something you should determine with your online tax software or by working with your accountant.

Hiring an accountant to help me navigate a variety of small business tax issues was one of the smartest moves I’ve made. It’s relatively expensive, but in many ways, it pays for itself in saved time and by preventing costly mistakes.

As for physically paying your taxes, you can do this by check, online, or pay with a credit card. The IRS makes it easy to create an EIN (like a Social Security Number for your business), which it uses to track your business income and taxes. Then you can easily set up electronic payments to the IRS. This makes it quick and easy to pay your taxes online.

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. Hiring an accountant is one business expense I don’t mind paying.

Use Tax Software

If you are still pretty small, tax software will handle 95% of any of the tax problems that you could possibly come up with. While there are now a ton of tax software options, three of the top performers include:

  • TurboTax – At this point, if you haven’t heard of TurboTax you are probably living under a rock. Their small business plan is a great way to make sure you do your taxes well.
  • H&R Block – One of the largest providers for in person and online tax help, H&R Block has all the features you need to do your taxes correctly.
  • Tax Slayer – One of the oldest online tax prep platforms, TaxSlayer is full featured and ready to help you get your self employment taxes done.

Consider Using a Payroll Service

If you make enough money through your small business, you may consider paying yourself a salary, complete with paying state and federal taxes through your payroll, filing a W-2, etc. There is an added cost to do this unless you want to manage all the filings yourself.

But it can be worth it in the long run, depending on your business structure, and other items. I previously used PayChex to run my payroll, but I now use Gusto (formerly ZenPayroll).

Added benefits of using these types of services include automated payroll and tax filing, ability to automatically contribute to a self-employed retirement plan, and having your pay documented on a W-2. This can make it easier to obtain a mortgage if you are self-employed.

Setting up payroll was a great administrative move for my small business and I recommend it if your income justifies it. It’s a good long-term move and it adds to the legitimacy of your business.

Additional IRS Resources:

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About Ryan Guina

Ryan Guina is the founder and editor of Cash Money Life. He is a writer, small business owner, and entrepreneur. He served over 6 years on active duty in the USAF and is a current member of the IL Air National Guard.

Ryan started Cash Money Life in 2007 after separating from active duty military service and has been writing about financial, small business, and military benefits topics since then. He also writes about military money topics and military and veterans benefits at The Military Wallet.

Ryan uses Personal Capital to track and manage his finances. Personal Capital is a free software program that allows him to track his net worth, balance his investment portfolio, track his income and expenses, and much more. You can open a free account here.

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  1. Lisa says

    Was thinking of moving to Oklahoma but our income is from our self employment in the State of Texas (our income derives from a business that’s based in Texas). Would I have to pay taxes in both states? I understand that Oklahoma has a State income tax also, just how would that affect me?

    • Ryan Guina says

      Lisa, I recommend speaking with a tax professional or small business advisor for more specific information. Generally, you would have to pay income taxes in the state in which you reside, and sales taxes in the state where the sales occur. Payroll taxes are generally made in whichever state the employees do the physical work. All of that aside, some states offer credits if you have paid taxes in another state. In short, this can get complicated depending on the situation. The only way to know for certain is to have a tax professional review your entire situation and give recommendations based on the specifics of your business and residence status. Best wishes with your business and the potential move!

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