What is Self-Employment Tax?

The self-employment tax is a federal tax paid by freelancers, independent contractors, small business owners, and others on their net earnings. It’s a tax method used to collect Social Security and Medicare taxes from individuals who are self-employed. It equals the total amount due for those two taxes.

Self-Employment Tax Rate

The federal law has set the self-employment tax rate at 15.3 percent of net earnings. This rate combines a 12.4 percent Social Security tax and a 2.9 percent Medicare tax. For 2023, the Social Security tax for self-employed individuals is only due on the first 160,200 dollars of net earnings. The Medicare tax must be paid no matter how much you earn, and you must also pay an additional 0.9 percent Medicare tax if your net earnings are more than 200,000 dollars for single filers or 250,000 dollars if you file jointly.

Exemption from Self-Employment Tax

Generally, net earnings from self-employment of less than 400 dollars during the year are not subject to the self-employment tax. Also, if you earned money working for someone as an employee, you don’t have to pay the self-employment tax on those earnings as long as the employer withheld payroll taxes on them. They will be taxed as regular income.

How to Calculate Self-Employment Tax

To calculate your self-employment tax, determine your net earnings for the year using IRS Schedule C. After entering your gross earnings on the form, subtract all deductions, such as business expenses. Next, use IRS Schedule SE to figure out the tax due on your net earnings from self-employment. Before you calculate the required tax, the IRS allows you to deduct 7.65 percent of your net earnings, reducing the amount you will have to pay.

How to Report Self-Employment Tax

Report the employment tax by filling both Schedule C and Schedule SE with your IRS Form 1040. Enter the amount due for the tax in the “Other Taxes” section of Form 1040. You can also claim 50 percent of your self-employment tax as an income tax deduction on Form 1040.

When to Make Payments

Under most circumstances, the self-employment tax must be paid during the year by filing quarterly estimated tax payments. Waiting to pay the tax until the following April when your annual tax return is due may result in a penalty charge. You can make quarterly payments online using the Electronic Federal Tax Payment System, or you can submit vouchers found in IRS Form 1040-ES.

Consult a qualified tax advisor to make sure you correctly calculate and pay the self-employment tax.