What Is the Self-Employment Tax?
Freelancers, independent contractors, and other self-employed professionals are responsible for paying several taxes on their earnings—one of which is the self-employment tax (SE tax). Used to fund Social Security and Medicare, the SE tax equals the total amount due for those two programs.
This levy is higher than the Social Security and Medicare taxes you pay when you work for someone else because employers are required to split these taxes with their employees. While self-employed, you're responsible for paying the full amount yourself.
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How Much Is the Self-Employment Tax?
The SE tax applies to 92.35% of your net earnings. Net earnings are calculated by subtracting your business expenses from your gross income. The amount you pay in SE taxes can vary from year to year based on this figure. Here are some other factors to consider:
- Did you make enough? Net earnings below $400 are usually not subject to the SE tax.
- Did you work for someone else? If you earned money by working for someone as an employee for part of the year and your employer withheld Social Security and Medicare payroll taxes, you won't have to pay on those earnings again.
- Are you a church employee? The IRS handles religious workers' earnings a bit differently than other self-employed individuals. Unless exempt, church employees who earn more than $108.28 must pay the SE tax.
- Do you work as a family caregiver? Special rules apply to family caregivers who aren't employees of a company.
If your business's expenses exceed its income, the result is a net loss. You may deduct net losses from your gross income but only to a certain extent. For more information, refer to Publication 334, Tax Guide for Small Business.
Self-Employment Tax Rate
The SE tax rate is 15.3%—the combined total of the 12.4% Social Security tax and 2.9% Medicare tax. This contribution funds those programs, which provide benefits to retirees, people with disabilities, and children. These taxes apply in different ways:
- Social Security Tax: For 2023, the Social Security tax for self-employed individuals is only due on the first $160,200 of your earnings.
- Medicare Tax: This levy applies no matter how much you make. Plus, you must pay an additional 0.9% Medicare tax if your income exceeds $200,000 (single, head of household), $250,000 (married filing jointly), or $125,000 (married filing separately).
Along with the SE tax, you may also be responsible for paying federal income taxes. As a self-employed person, you have to file an income tax return if your net earnings equal at least $400. And even if they don't, you may still have to file an income tax return per the additional filing requirements listed in Form 1040.
State and Local Taxes
State and local taxes are also separate from the SE tax. You'll likely have to pay state income tax, as well as sales and use taxes. These might apply to your situation in different ways:
- Sales Tax: You may need to collect and remit sales tax on the retail goods and services you provide to your customers.
- Use Tax: This applies to items purchased for your business tax-free that would have otherwise been taxed in your state.
For example, let's say you work in New York but buy an office laptop online from a seller in another state. If the seller doesn't collect NY state and local taxes, you're still responsible for paying them later. These tax rates and regulations vary by location—visit your state government website for more information.
Self-Employment Tax Deductions
Many tax breaks are available for entrepreneurs. For instance, you can deduct the employer portion of the SE tax from your adjusted gross income. Another example is the qualified business income (QBI) deduction. It allows you to deduct up to 20% of your QBI, plus 20% of real estate investment trust (REIT) dividends and publicly traded partnership (PTP) income.
Other common deductions include:
- Retirement savings plan
- Health insurance premium
- Home office equipment
- Business loan interest
- Rental space
- Internet and telephone costs
- Work-related education expenses (e.g., tuition, books, supplies, lab fees)
- Travel and meal expenses
- Vehicle and mileage expenses
If you're unsure if your self-employment expenses qualify for a write-off, reach out to a tax professional.
Self-Employment Tax Forms
To report and file Social Security and Medicare taxes, you'll need Schedule SE (Form 1040), Self-Employment Tax. However, you can use the estimated tax method to pay income and SE tax using Form 1040-ES, Estimated Tax for Individuals. Depending on the business structure (sole proprietorship, LLC, partnership, etc.), you'll likely need additional forms.
When Are Self-Employment Taxes Due?
Under most circumstances, you'll need to file an annual tax return and make 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. Each quarterly pay period coincides with an IRS due date:
Filing Due Date
If the due date falls on a weekend or federal holiday, you have until the next business day to file without incurring penalties.
How to File Self-Employment Taxes
Filing and submitting SE taxes can be complex, so most entrepreneurs use tax software or hire a professional to help make it easier. Here's a general overview of the process:
- Step 1: Calculate your total income earned from self-employment.
- Step 2: Gather the statements reflecting your business expenses and calculate the total amount.
- Step 3: Identify what expenses qualify as tax deductions.
- Step 4: Complete the applicable tax forms and submit your payment.
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