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What Do I Pay in Self-Employment Tax?

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Shan-Nel S.Verified

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Your Tax Obligations

Whether or not you received a 1099 form, you need to report all earnings to the IRS. If your expected tax bill is over $1,000, make quarterly tax payments.

Owning a business can provide more flexibility than traditional employment, but it may also come with a bigger tax bill. Self-employed taxpayers must pay both the employer and employee parts of Social Security and Medicare tax. Fortunately, there are ways you can reduce self-employment tax (SE tax) liability. You can also deduct part of your self-employment tax from your income taxes.

Defining self-employed

According to the Internal Revenue Service (IRS), you are self-employed if you are a sole proprietor, an independent contractor or a member of a business or trade partnership. You must also be engaged in a trade or business.

An IRS form with a self-employed checklist

If you run a part-time small business on the side, the income it generates is also self-employment income. For example, imagine you are employed (full or part-time), but you make and sell crafts in your spare time. Your salary is $75,000, and you earn an extra $8,000 from your craft business. You must pay SE tax on the $8,000 in net earnings from your crafting business.

Income threshold for paying SE tax

The IRS does not levy SE tax if your net earnings are $400 per year or less. Special rules exist for church employees, including ministers. They must pay self-employment tax if their net income for the year is over $108.28.

Explaining self-employment tax

Self-employment tax breaks down into two portions: the employer portion and the employee portion. Employers withhold 6.2% of employee wages in Social Security tax, plus an additional 1.45% for Medicare tax. The employer  then matches those amounts, sending them in a combined payment to the IRS.

Social Security tax

Self-employed individuals pay a combined rate of 12.4% in Social Security tax. However, this portion of SE tax has a cutoff point. The cutoff amount is indexed for inflation, so it goes up every year. In 2016, you must pay Social Security tax on the first $118,500 of your net earnings.

You can split your tax liability between employment income and self-employment income. For instance, imagine you make a salary of $100,000 per year from a traditional employee job with an additional $40,000 in self-employment income. The tax deductions from your paycheck prevent you from owing more tax on your salary. Because of the cutoff, you only pay 12.4% Social Security tax on the first $18,500 of the $40,000 in self-employment income because you are already paying Social Security tax on $100,000 you earn from your other job.

Medicare tax

There is no cutoff point for Medicare taxes. You will pay 2.9% of all net income from self-employment, regardless of how much you earn.

You will pay a 0.9% additional Medicare tax on income that exceeds a certain threshold. This depends on filing status.

  • Single filers: $200,000
  • Married filing jointly: $250,000
  • Married filing separate: $125,000

The additional Medicare tax applies to all taxpayers with income over these amounts, not just self-employed individuals. However, it is still calculated as part of SE tax unless all your income is from employment or investments.

Here is how this breaks down: imagine you are a single taxpayer with self-employment income of $300,000. Your Social Security tax caps at $14,694. Your Medicaid tax is $8,908, which is 2.9% of your adjusted net earnings, plus an additional 0.9% of the $100,000 that exceeds the income threshold.

Reporting self-employment tax

If you have self-employment income, use Form 1040 to file your taxes. You will also use Schedule C to calculate net earnings from your business. Calculate and report self-employment tax on Schedule SE.

IRS form 1040

You will report SE tax on Form 1040, under “Other Taxes.” You will combine income tax and self-employment tax to determine your total tax liability.

Calculating SE tax

When you calculate self-employment tax, this reduces your self-employment income by half of the tax before you apply the full rate. Essentially, you will calculate your SE tax twice. Here is an example.

Say your net earnings amount to $80,000. Multiply your net earnings by 15.3% (12.4% from Social Security tax + 2.9% from Medicare tax) to get the tax you would owe if you paid it on the full amount. In this case, it is $12,240. Take half of that tax, $6,120, and subtract it from your taxable income. The difference is $73,880.

Now calculate your actual self-employment tax by taking $73,880 and multiply it with the SE tax rate of 15.3%. Your final self-employment tax liability is $11,304, rounded to the nearest dollar.

Applying Social Security income thresholds

Calculating self-employment tax takes a little more work when your income crosses the Social Security tax threshold. The full 12.4% Social Security rate only applies to the first $127,200 you earn; after this threshold, you do not pay additional Social Security taxes. All of your income, however, is taxed for Medicare. Medicare levies at least a 2.9% Medicare tax, with high-income individuals paying an additional 0.9% past income higher than $200,000.

For instance, assume your self-employment income is $180,000, making your taxable self-employment earnings $127,200. Your Social Security tax caps at $14,694. Medicare tax is calculated on all taxable income and amounts to $4,642. Your total SE tax bill is $19,336.

Using the SE tax deduction

Self-employment tax may seem steep, but there is good news. Since SE tax and income tax are separate, you can deduct half of your self-employment tax from your regular taxes. For example, if you owe SE tax of $20,000, you can deduct $10,000 of it from your income tax.

SE tax deduction and additional Medicare tax

There is an exception to this rule. Even though it is part of self-employment tax, you cannot deduct any portion of the additional Medicare tax.

Here is how it breaks down for married joint filers who make $300,000 per year.

 

Social Security (12.4%)

Medicare (2.9%)

Additional Medicare (0.9%)

Taxable Income

127,200

$300,000

$300,000

Self-Employment Adjustment (-)

$0

$23,4400

$250,000

Adjusted Taxable Income

$127,200

$276,600

$50,000

Self-Employment Tax Owed

$15,773

$8,500

$450

Deductible Portion

$12,136

$4,011

$0

The couple has a total SE tax liability of $23,166. However, they can only take $11,358 as an income tax deduction.

Paying self-employment tax

With standard employment, it is the employer’s responsibility to withhold and send in payroll taxes. When you are self-employed, this becomes part of your self-employment tax obligations. These requirements include filing an annual tax return and paying quarterly estimated tax payments.

If this is your first time filing SE taxes, pay the tax along with your regular tax bill. Afterward, you must pay estimated tax payments in any year that you expect to owe more than $1,000 in self-employment tax.

You will make estimated tax payments four times per year. The due dates depend on whether you follow a calendar year or use a fiscal year for your business. The Electronic Federal Tax Payment System is the easiest way to make estimated tax payments. However, you can mail payments in if you prefer.

Reducing self-employment tax liability

There are two primary methods of reducing your tax bill for self-employment income, your business structure, and business expenses.

Reviewing an IRS form before submitting

Make an S Corporation election

Companies structured as a corporation or limited liability company (LLC) can make an S-Corp election with the IRS. An S Corporation structure allows you pay yourself a reasonable salary from the company earnings. The rest of the money either remains in the business or you can take it as a profit distribution.

Here is why it helps: you only pay self-employment taxes on your salary. So, if your S-Corp makes $100,000 and you only pay yourself $50,000, you will only pay self-employment taxes on the $50,000. Although you still pay tax on profit distributions, you will not pay as much.

File Schedule C

Schedule C essentially boils down to a profit and loss statement for your business. It allows you to deduct several business expenses. These include but are not limited to:

  • Qualified retirement contributions
  • Office supplies
  • Meals and travel related to business
  • Property and equipment depreciation
  • Self-employed health insurance premiums
  • Other ordinary and necessary business expenses

These deductions reduce your taxable income, which in turn reduces the amount of self-employment tax you owe.

Figuring self-employment taxes can be challenging. You should also make sure you are not overlooking business deductions that can save you money. If you need help determining what you owe, ask a tax Expert for assistance. Get affordable answers from verified Experts without an appointment or waiting for business hours.

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