It takes strong organizational skills and planning aptitude to succeed as a self-employed individual. One of the first items to consider is the eponymously named self-employment tax. The U.S. government requires the annual tax, which is drawn from the net earnings of people who work for themselves.
While working for yourself means you don’t have to worry about dealing with an overbearing boss, you will not be able to avoid the self-employment tax. Read on for details about self-employment tax rates, such as calculating your appropriate tax contribution and how to make payments.
Tax rates for the self-employed
Not to be confused with income tax (which the self-employed also pay), self-employment tax falls into two categories: Medicare and Social Security tax.
The self-employed tax rate is 15.3% of your net self-employed income (i.e., your profit.)1 Here’s the breakdown of the estimated tax you’ll owe:
- Social Security: 12.4%. While the rate changes each year, for 2022, a threshold of $147,000 of your earnings is subject to the Social Security tax.
- Medicare: 2.9%. Under the Affordable Care Act (ACA), an additional 0.9% Medicare tax may be applied if your self-employment net earnings exceed the following thresholds:2
- $200,000 (single filer, head of household with a qualifying person, and qualifying widow or widower with dependent child)
- $250,000 (joint filing for married couples)
- $125,000 (married couples filing separately)
How to calculate the self-employment tax
The first step to figuring how much you owe is to determine your net earnings (or your profit). To find this, simply deduct your business expenses from your business revenue. Keeping a log of expenses and income throughout the year can make this task much easier come tax time.
Once you know your net earnings, you can apply Medicare and Social Security tax percentages. That’s assuming you have a net profit. You have a net loss if your business expenses are more than your business income.
Here’s an example: Alicia made $157,000 in net earnings from self-employment this year. She is a single filer and will have to apply a 12.4% tax on her first $147,000. The remaining $10,000 is not subject to the Social Security tax.
Alicia should run the following calculation to determine the tax amount she will pay: 147,000 x 0.124 = 18,228. So, Alicia owes $18,228 in self-employment tax without deductions.
Who has to pay self-employment tax?
Anyone who is self-employed and makes a profit must pay self-employment tax. Specifically, any self-employed person who, within a given year:
- made or exceeded $400 in taxable income while self-employed or
- made or exceeded $108.28 in income from church employment.
You are subject to these tax rules, regardless of your age or whether you are already receiving Social Security or are serviced by Medicare.
All small business income is subject to the tax. For pass-through institutions, net profit is provided directly to owners, leaving them responsible for reporting that profit on personal tax returns.
Examples of pass-through businesses include:
- Limited liability companies (LLCs),
- sole proprietorships and independent contractors, and
- traditional partnerships.
How to pay self-employment tax
Just like you wouldn’t procrastinate on a big project for a client, it’s a good idea to plan to pay your estimated self-employment tax quarterly. You’ll need to estimate how much income you expect to make throughout the year.
So, how do you estimate your self-employment tax? Fortunately, there’s a worksheet for that in Form 1040-ES (Estimated Tax for Individuals). The worksheet will tell you if you need to file an estimated tax. There’s also Form 1040-SR, which is for anyone age 65 and better. But before you fill out those forms, you’ll want to have your prior year’s tax return handy.
To file, you’ll need a Social Security number or Individual Taxpayer Identification Number (ITIN). When you’re ready to file, you can make the payment online or mail the voucher (included with form 1040-SE).
Because the 15.3% self-employment tax rate only applies to your net earnings, you have an opportunity to save by subtracting tax deductions (like business expenses) from your gross revenue.
With some research, you can find additional self-employment tax deductions that might apply to you:
- Qualifying work-related education,
- vehicle (for business use) expenses, and
- house-related costs (if you operate a business partly out of your residence or work from home).
These deductions apply to just a few individuals, but they’re worth exploring. After all, a bit of research or consultation can save you a pretty penny in estimated tax payments.
What do I do if I have self-employment income and employment income?
For those multitaskers with both self-employment and employment income, you must submit both for consideration using the long form of Schedule SE (Form 1040). Note that:
- Social Security tax is capped at the yearly maximum,
- additional Medicare tax is applied at the threshold if applicable, and
- self-employment tax can be calculated accurately, with employment first and then self-employment income to the threshold for Social Security.
Taking your future into your hands
Are you ready for your pop quiz? Just kidding. But if you’re new to the world of self-employment, just remember that a little planning can go a long way. Keeping up with your profits and expenses as you go will make filing much easier down the road. You can always reach out to a tax professional should you need assistance.
Just as it’s essential to manage your business responsibly, it’s also important to protect your financial assets, day-to-day operations and reputation with small business insurance. That’s where Thimble comes in. We provide the coverage you need when you need it, so you can make sure nothing comes between you and doing what you love. Click get a quote or download the Thimble mobile app. Answer a few questions, and you can get a policy in just a few minutes. You aced it.