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An HR Glossary for HR Terms

Glossary of Human Resources Management and Employee Benefit Terms

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Self-Employment Tax

What Is the 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 used to collect Social Security and Medicare taxes from self-employed individuals. The self-employment tax equals the total amount due for those two taxes.

The self-employment tax is higher than the Social Security and Medicare taxes you pay when you work for someone else because employers are required to pay half their employees’ Social Security and Medicare taxes. As a self-employed person, you have to pay the entire amount yourself.  

What Is the Self-Employment Tax Rate? 

Federal law sets the self-employment tax rate at 15.3 percent of net earnings. This rate is the combined total of a 12.4 percent Social Security tax and a 2.9 percent Medicare tax. For 2020, the Social Security tax for self-employed individuals is only due on the first 137,700 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.

How Much Can I Earn Before Paying the 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 by 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. 

There are also some less common situations that require you to pay the self-employment tax:

  • U.S. citizens who are employed by a foreign government

  • Church employees who earn more than 108.28 dollars during the year

How Do I Calculate My Self-Employment Tax?

Determine your net earnings for the year using IRS Schedule C. Enter your gross earnings on the form, and then subtract all deductions, such as business expenses.

Next, use IRS Schedule SE to figure the tax due on your net earnings from self-employment. Before you calculate the tax, the IRS allows you to deduct 7.65 percent of your net earnings, reducing the amount you will have to pay.

How Do I Report the Self-Employment Tax?

File both Schedule C and Schedule SE with your IRS Form 1040. Enter the amount due for the self-employment 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 Do I Have to Pay the Self-Employment Tax?

Under most circumstances, the self-employment tax must be paid during the year by filing quarterly estimated tax payments. If you wait to pay the tax until the following April when your annual tax return is due, the IRS may add 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 do everything right when calculating and paying the self-employment tax.

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