Joining the ranks of the self-employed is a dream for so many. But that freedom comes with a certain cost.
Taxes become more complex when you decide to become self-employed. The self-employment tax is your single biggest concern. Today, the self-employment tax is set at 15.3%.
We’re going to show you what you need to know about the self-employment tax. You’re going to learn about how it works, how to use the self-employment calculator, and how to deduct as much as you possibly can.
Table of Contents
Self-Employment Tax – What is It?
The self-employment tax consists of two parts. You’re essentially paying for both Medicare and Social Security, which collectively makes up 15.3% of your total earnings.
Remember that if you’re self-employed, you also need to pay both self-employment taxes and income taxes.
You can’t avoid paying for Social Security and Medicare. Every earner in the country must pay them, whether you’re self-employed or work as a salaried employee.
The difference is that when you’re an employee, your boss pays half of those taxes. When you’re self-employed, you must pay the taxes in full.
How Much Do You Have to Pay Towards Social Security?
Social Security makes up 12.4% of the self-employment tax. You must pay Social Security taxes on earned income up to $128,400 in 2018, but in 2019 this is going to jump up to $132,900.
This applies to all earned income, rather than just income you earn from being self-employed. Anything earned above $132,900 in 2019 won’t be taxed for the purposes of Social Security.
How Much Do You Have to Pay Towards Medicare?
The tax rate for Medicare is 2.9%. The difference is there’s no earning limit. On the contrary, once you earn over a certain amount, you get hit by an additional tax of 0.9%.
You’ll qualify for the additional tax if you earn more than $200,000 as a single filer or $250,000 for someone who’s married and filing jointly.
This means that if you cross this threshold, your Medicare tax is 3.8% on anything above that threshold.
You can find out more about the Additional Medicare tax by visiting the IRS website.
Do You Need to Pay Self-Employment Taxes?
The chances are you do. You’re considered to be self-employed, in the eyes of the IRS, if you happen to be a sole proprietor, an independent contractor, or part of a partnership.
Also, if you happen to be a salaried employee with a side gig, you may need to pay self-employment taxes on the earnings from your side hustle.
Just remember that self-employment taxes aren’t withheld automatically by the IRS. You may also need to make quarterly self-employment tax payments if you have more than $1,000 due on your tax return when filing.
Visit the IRS website to find out more about how this works.
How to Calculate Your Self-Employment Tax
Try using the self-employment calculator to see how much you can increase your tax savings by applying your estimated self-employed business expenses.
Here are some common self-employed business expenses you can enter into the calculator:
- office space rental
- business travel
- meals & entertainment
- mobile phone & accessories
- training courses
- association membership fees
- business equipment
- business licenses & permits
- office supplies
- marketing expenses
- accounting & legal fees
- car repairs & maintenance
How to Calculate Your Self-Employment Tax Manually
You’ll need to use Form 1040 to file your taxes. This is the individual income tax return, and you’ll be using both Form 1040 and Schedule SE. Together, this will calculate how much you owe in self-employment taxes.
This form is used to show how much you’ve earned and how much you owe. You won’t perform the actual calculations here.
1 – Decide How Much of Your Earnings is Taxable
For the purposes of the example, we’re going to assume that you earned $100,000 through your self-employment.
The IRS says that most of your earnings would be subject to self-employment taxes. You should multiply your earnings by .9235 to get your taxable earnings.
In this case, this comes to $92,350.
So why is this amount of your earnings taxable? This calculation considers a 7.65% deduction for the employer half of your FICA taxes. The business can deduct this because you’re treated as an employee.
Someone who’s self-employed is always able to deduct this amount.
2 – How Much Do You Owe to the IRS?
The third step is to multiply your taxable income by 15.3%. In this case, you’re multiplying $92,350 by 15.3% to get $14,129.55.
This is how much you owe to the IRS in self-employment taxes. Write down the whole self-employment tax amount under the section labeled ‘Other Taxes’ on Form 1040.
3 – Report Your Self-Employment Tax in the Right Way
The final step is to report half of your self-employment taxes as a gross income adjustment. This will allow you to reduce your income taxes.
In the view of the IRS, they consider this to be the part of the self-employment tax paid by the employer.
If we go back to our figure of $14,129.55, we can cut that in half and report $7,064.78 as an income adjustment.
It’s really that easy to calculate self-employment taxes. Just make sure you double-check your calculations to ensure you don’t make a mistake and inadvertently get audited!
File Your Taxes Online and Get The Most Deductions
Online tax filing is developed with do-it-yourself filers in mind. We guide you step by step with simple, plain-English questions and apply the appropriate tax laws in the background.
We also do the math and fill in all the right tax forms. We will even recommend the best choices for you when it comes to filing status, deductions and credits, and other areas that affect your taxes. If you have worked for an employer we can find your W2 form online.
Plus, we check your return for errors and tell you how to fix them. And if you’re ever unsure of an answer, or need some expert advice on your taxes, you can talk one-on-one with one of our highly-skilled tax professionals for free.
They even have a free self employed calculator available that allows you to know the amount of deductions on your tax return.