Self-Employment Tax: What It Is – How To Calculate It

Self-Employment Tax: What It Is – How To Calculate It

Being self-employed is often considered the American dream – you’re your own boss, you can make your own schedule, and you get to enjoy the profits of your hard work. However, being self-employed also means taking on some additional responsibilities, such as managing your own taxes. One of the taxes that self-employed individuals have to pay is the self-employment tax (SE tax). In this article, we’ll cover what the SE tax is and how to calculate it.

What is the self-employment tax?

The self-employment tax is a tax that self-employed individuals must pay to fund social security and medicare. Similar to the payroll taxes that employees have deducted from their paychecks, the SE tax is made up of two parts: social security tax and medicare tax. For the self-employed, this means paying the full 15.3% tax rate, instead of the 7.65% that employees and their employers pay (with each contributing 6.2% for social security and 1.45% for medicare).

How is the self-employment tax calculated?

Calculating the self-employment tax can be a bit complicated, but it’s important to understand how it works to make sure you’re paying the right amount. Here are the steps to calculate your SE tax:

1. Determine your net self-employment income: This is your total self-employment income minus any deductions or business expenses you can claim on your taxes.
2. Multiply your net self-employment income by 92.35%: This accounts for the fact that employees only pay taxes on 92.35% of their income, as their employer pays the other 7.65%.
3. Multiply that number by 15.3%: This is the current self-employment tax rate, which is made up of 12.4% for social security and 2.9% for medicare.
4. Report your SE tax on your tax return: When you file your taxes, you’ll report your SE tax on Schedule SE of your Form 1040.

FAQs

Do I have to pay the self-employment tax if I have a side hustle?

If your side hustle is earning you more than $400 in net income per year, then yes, you’ll have to pay the self-employment tax.

Do I still have to pay the self-employment tax if I make no profit?

Technically, no – the self-employment tax is based on your net self-employment income. However, if you’re self-employed and not making a profit, you may want to consult with a tax professional to determine if you should still be paying taxes or if you need to adjust your business structure.

Can I deduct the self-employment tax from my income taxes?

Yes, you can deduct half of your self-employment tax from your income taxes – this is equivalent to the employer portion of the payroll tax that employees don’t have to pay.

Is the self-employment tax the same as income tax?

No, the self-employment tax is a separate tax from income tax. Income tax is based on your taxable income (which includes both W-2 wages and self-employment income), while the self-employment tax is based only on your self-employment income.

If I’m self-employed, do I still have to pay Social Security and Medicare taxes when I retire?

Yes, if you’re self-employed, you’re still responsible for paying Social Security and Medicare taxes during your working years, and you’ll still be eligible for benefits when you retire.

Do I still have to pay self-employment tax if I’m already paying into Social Security and Medicare?

Yes, even if you’re already paying into Social Security and Medicare through other means (such as your spouse’s employment), you’re still responsible for paying the self-employment tax if you have your own self-employment income.

What if I don’t pay the self-employment tax?

If you don’t pay the self-employment tax, you could face penalties and interest charges from the IRS. You also won’t be eligible for Social Security and Medicare benefits when you retire.

Is there a maximum amount of self-employment tax I have to pay?

Yes, there is a maximum amount of self-employment tax that you’ll have to pay each year. For 2021, the maximum is $18,960, which comes out to 15.3% of $132,900 (the Social Security wage base).

What happens if I overpay my self-employment tax?

If you overpay your self-employment tax, you can either apply the excess amount to your next tax payment or request a refund from the IRS.

If I’m self-employed, do I still have to file quarterly estimated taxes?

Yes, if you’re self-employed, you’re required to file quarterly estimated taxes to avoid penalties from the IRS. This is because you don’t have an employer withholding taxes from your paycheck throughout the year.

What expenses can I deduct to lower my self-employment tax?

There are a few expenses that self-employed individuals can deduct to lower their self-employment tax, such as:

• Home office expenses
• Business travel expenses
• Office supplies and equipment
• Health insurance premiums
• Retirement plan contributions

When is the deadline to file my self-employment tax?

The deadline to file your self-employment tax is typically April 15th, unless you’ve filed for an extension. However, it’s important to check the IRS website for any updates or changes to the deadline.