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If you’re a freelancer, independent contractor or small-business owner, you may need to pay self-employment tax. Here’s what it is, how it works and how you can save.
What is self-employment tax?
Self-employment tax is a combination of Social Security and Medicare taxes that self-employed people are required to pay. These are not income taxes. Self-employment tax doesn’t apply to a person’s gross sales from a business; it applies to the business’s net earnings — what many people think of as profit. You may need to remit your self-employment taxes throughout the year rather than in April when you file your income tax return.
The self-employment tax rate
The self-employment tax rate is 15.3% of net earnings in 2019. That rate is the sum of a 12.4% Social Security tax and a 2.9% Medicare tax on net earnings.
- One big difference between self-employment tax and the payroll taxes people with jobs pay is that typically employees and their employers split the bill on Social Security and Medicare (i.e., you pay 7.65% and your employer pays 7.65%); self-employed people pay both halves.
- For 2019, only the first $132,900 of earnings is subject to the Social Security portion.
- A 0.9% additional Medicare tax may also apply if your net earnings from self-employment exceed $200,000 if you’re a single filer or $250,000 if you’re filing jointly.
How to calculate self-employment tax
Calculating your tax starts by calculating your net earnings from self-employment for the year.
- For tax purposes, net earnings usually are your gross income from self-employment minus your business expenses.
- Generally, 92.35% of your net earnings from self-employment is subject to self-employment tax.
- Once you’ve determined how much of your net earnings from self-employment are subject to tax, apply the 15.3% tax rate.
- Remember, though — for 2019, only the first $132,900 of earnings is subject to the Social Security portion of self-employment tax.
- If you had a loss or just a little bit of income from self-employment, be sure to check out the two optional methods in IRS Schedule SE to calculate your net earnings.
Who has to pay self-employment tax?
In general, you have to pay self-employment tax if either of these things are true during the year:
- You had $400 or more in net earnings from self-employment (excluding anything you made as a church employee).
- You had $108.28 or more in income from church employment.
The tax rules apply no matter how old you are and even if you’re receiving Social Security or are on Medicare.
How to pay self-employment tax
- Generally, you use IRS Schedule C or C-EZ to calculate your net earnings from self-employment.
- You use IRS Schedule SE to calculate how much self-employment tax you owe.
- You’ll need to provide your Social Security number or individual taxpayer identification number (ITIN) when you pay the tax.
- Taxes are a pay-as-you-go deal in the United States, so waiting until April to pay your self-employment tax may mean incurring late-payment penalties. Instead, you may need to make quarterly estimated tax payments throughout the year if you expect:
- You’ll owe at least $1,000 in federal income taxes this year, even after accounting for your withholding and refundable credits (such as the earned income tax credit), and
- Your withholding and refundable credits will cover less than 90% of your tax liability for this year or 100% of your liability last year, whichever is smaller. (The threshold is 110% if your adjusted gross income last year was more than $150,000 for married couples filing jointly or $75,000 for singles.)
Tax deductions for self-employment
You can deduct half of your self-employment tax on your income taxes. So, for example, if your Schedule SE says you owe $2,000 in self-employment tax for the year, you’ll need to pay that money when it’s due during the year, but at tax time $1,000 would be deductible on your 1040.
Self-employment can score you a bunch of sweet tax deductions, too. One is the qualified business income deduction, which lets you take an income tax deduction for as much as 20% of your self-employment net income. (Learn more about that here.) Plus, there are other deductions available for your home office, health insurance and more. Here’s a primer.
Want to take action?
See if you can take these 5 big tax deductions for the self-employed
Want to dive deeper?
Check out our tax guide for freelancers
Want to explore related?
Find out which tax software has options for self-employed people