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Being your own boss can be rewarding, but one of the drawbacks is that you have to pay self-employment taxes.
The self-employment tax is the 15.3% tax you’ll pay for Social Security and Medicare taxes if you’re a small business owner, sole proprietor, independent contractor, or freelancer. When you become self-employed, you’re responsible for calculating and withholding these taxes.
If you’re not sure how to calculate the self-employment tax or budget for this expense, you’re in the right place. This article will walk you through what the self-employment tax is, when you need to pay it, and how to calculate self-employment taxes. We’ll also cover the forms self-employed people should use to file and pay these taxes, along with some tax deductions that can ease the burden of this expense.
Self-employment tax explained
The self-employment tax is a 15.3% tax you pay on your earnings when you work for yourself that goes toward Social Security and Medicare. When you’re a traditionally employed worker who gets a W-2, you only pay 7.65% of your income in Social Security taxes and Medicare taxes because your employer kicks in the other 7.65%. Sometimes, these taxes are called FICA taxes (aka Federal Insurance Contribution Act taxes) or payroll taxes.
But self-employed people are responsible for both the employer’s and the employee’s halves of these taxes. That’s why the SE tax rate is typically double the FICA tax rate, or 15.3% when you work for yourself.
A breakdown of self-employment taxes
Below, you’ll find a breakdown of self-employment taxes if you’re a small business owner, contractor, or freelancer. Note that you pay these taxes in addition to any ordinary income taxes and business taxes for which you’re responsible.
Social Security taxes
Self-employed individuals pay 12.4% of their wages in Social Security taxes up to an earnings threshold called the Social Security wage cap that’s adjusted annually for inflation. The Social Security wage cap is $168,600 in 2024, up from $160,200 in 2023. Earnings above these amounts are shielded from Social Security taxes. If you worked a regular W-2 job, you and your employer would each pay 6.2% of your earnings in Social Security taxes up to the annual limit.
Medicare taxes
Self-employed people also pay 2.9% of their earnings in Medicare taxes, representing both the employer’s and employee’s 1.45% contribution toward Medicare. Unlike Social Security, Medicare doesn’t have a wage cap. In fact, if you earn more than $200,000 as a single filer or $250,000 if you’re married filing jointly, you’ll owe an additional Medicare tax of 0.9%.
Who has to pay self-employment tax?
You’ll generally need to pay SE tax if you have a net income of more than $400 for the tax year from working for yourself. Here are some situations where your earnings would be subject to self-employment taxes.
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You own a business as a sole proprietorship or as a partner in a partnership.
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You’re an independent contractor.
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You have church employment income above $108.28 (note the lower threshold).
Note that there are a lot of situations where you may be classified as an independent contractor. If you provide your services directly to a business and aren’t considered an employee, you’re likely an independent contractor — even if you work for a single company. If you do freelance work, like writing or web design, you’re an independent contractor. The same goes for if you do yard work, babysit, or drive for Uber or Lyft as a side hustle.
If you have a side gig on top of a regular W-2 job, you’ll owe self-employment taxes on the portion of your earnings that comes from independent contractor work. For example, if you have a $50,000 salary from your main job but earn an extra $5,000 making grocery deliveries, you’d owe self-employment taxes — but only on the $5,000 of side income.
Usually, only 92.35% of your net earnings will be subject to self-employment taxes. That’s because the IRS doesn’t count the 7.65% your employer would typically pay as taxable income.
Tip: If you have both a regular W-2 job and self-employment income, you could increase your federal tax withholdings for the W-2 job to help cover the SE tax. To adjust your tax withholdings, submit a new Form W-4 to your employer.
Example of a calculation
Suppose you had net earnings of $100,000 from your landscaping business in 2023. You’d calculate your self-employment taxes as follows:
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Multiply your net earnings by 0.9235 to arrive at your taxable self-employment income: $100,000 x 0.9235 = $92,350
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Multiply your taxable self-employment income by 0.153 (the self-employment tax rate) to calculate your self-employment taxes: $92,350 x 0.153 = $14,129.55
Note that this calculation only tells you your obligation for Social Security and Medicare taxes. You’ll still be responsible for federal income taxes on top of any applicable state and local taxes. Since you’d expect your tax liability to exceed $1,000 for the year, the IRS would expect you to make quarterly estimated tax payments instead of waiting to pay the entire tax bill when you file your annual income tax return.
How to file and pay self-employment tax
To file and pay self-employment tax, you’ll need either a Social Security number or an Individual Taxpayer Identification Number (ITIN). Follow the steps below to file and pay SE tax.
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Gather the relevant documents: Examples of documents you may need include 1099 forms, bank account and credit card statements, and business receipts.
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Use Schedule C to calculate your net profit or net loss: To complete this step, you’ll subtract your business earnings from your business expenses. If you earned more than your expenses, you have a net profit. If your expenses exceed your earnings, you have a net loss. Note that a Schedule C is used if you’re earning self-employment income as a sole proprietor or as a single-member limited liability company (LLC). The process is different if your business is structured as a C corporation or an S corporation.
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Report your net profit or loss on IRS Form 1040 or IRS Form 1040-SR. If you have a net profit, you can report it as part of your income on page 1 using Form 1040. If you have a net loss, you may be able to deduct it from your gross income. Consult IRS Publication 334, Tax Guide for Small Business (For Individuals Who Use Schedule C) for the rules.
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Use Schedule SE to calculate and file your self-employment taxes. You’ll calculate your self-employment taxes using Schedule SE and report the amount due on the “Other taxes” section of Form 1040. If you’re a joint filer and both you and your spouse have self-employment income, you’ll need to include separate Schedule SE forms.
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Determine if you need to pay quarterly taxes. Use IRS Form 1040-ES to determine whether you need to make estimated tax payments and calculate the amount due. You’ll need to calculate your expected adjusted gross income, taxable income, tax liability, personal and self-employment tax deductions, and tax credits to estimate your tax payments.
Tax preparation gets more complicated when you become self-employed. You may want to use a tax software for self-employed people or enlist the help of a professional to ensure you follow all the rules while maximizing your self-employed tax deductions.
Read more: How to file income taxes as an independent contractor
Deduction from income taxes
Fortunately, there are two tax deductions available to self-employed people that can help lower the burden of these extra taxes.
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You can deduct half the amount of self-employment taxes you pay. For example, if you paid $2,000 in SE tax, you’d reduce your taxable income by $1,000. The reason for this is the portion of the tax that represents the employer’s half isn’t considered taxable income by the IRS. You can claim this deduction as an adjustment to income using Tax Form 1040, regardless of whether you itemize or take the standard deduction.
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You can take the Qualified Business Income (QBI) deduction for up to 20% of your taxable income. This deduction begins to phase out for single filers who earned more than $182,100 (2023) and $191,950 (2024). For married couples filing jointly, the phase-out begins at $364,200 (2023) and $383,900 (2024). The deduction is also available if you don’t itemize your return. Calculating this deduction can get complex, so consult with a tax professional if you have questions.
You may qualify for other small-business deductions that can lower your tax bill. For instance, if you use a portion of your home exclusively for business purposes, you may be eligible for the home office deduction. Self-employed people can also deduct the cost of their health insurance premiums.
When are self-employment taxes due?
If you’re self-employed, you’re typically responsible for making quarterly estimated tax payments for Social Security and Medicare taxes, as well as income taxes. That’s because you don’t have an employer who’s withholding these on your behalf.
The IRS requires you to pay estimated taxes if you expect to owe $1,000 at tax time after subtracting any taxes withheld and refundable tax credits. You can avoid an underpayment penalty if your quarterly tax payments add up to at least:
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90% of your tax liability for the current tax year, OR
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100% of your tax liability for the previous tax year
For example, if you owed $10,000 in taxes for 2023 and expect to owe the same amount in 2024, you’d want to pay at least $9,000 (90% of your 2023 tax obligation) in quarterly taxes throughout the year to avoid an underpayment penalty.
But what if you earn more and wind up owing $12,000 for 2024? If you want to play it safe and avoid risking a penalty in these situations, you could make sure your quarterly taxes add up to $10,000 (100% of your 2023 tax bill).
You’ll calculate your tax obligations using IRS Form 1040-ES. You’ll need to know your income for the previous year for tax preparation purposes when you fill out this form. You’ll also need to estimate your income for the current tax year.
Quarterly filing schedule
Despite the name “quarterly estimated tax payments,” the schedule for filing these tax payments doesn’t break down into three-month quarters. Here’s when you need to submit your self-employed taxes. If the due date falls on a weekend, tax payments are due the next weekday.
If you prefer, you can make more than four estimated tax payments. For example, you may find that it’s easier to budget for self-employment taxes if you pay each week or month.
FAQ
Do self-employment taxes include income taxes?
No. Self-employment taxes only consist of the 15.3% tax for Social Security and Medicare you need to pay if you own a business or do freelance or contract work. Self-employed people pay income taxes in addition to self-employment taxes.
What is not considered self-employment income?
Any money you earn as a W-2 employee isn’t considered self-employment income. For example, if you’re traditionally employed and receive a salary or an hourly wage, that money isn’t considered self-employment income. You’ll pay FICA taxes instead of self-employment taxes on these earnings.
How much self-employment income can I make without paying taxes?
You’ll typically need to pay self-employment taxes and file a tax return if your net earnings from self-employment exceed $400. However, you may still need to file a tax return if your self-employment income is less than $400. For a complete list of the rules, consult the instructions on IRS Form 1040.