Updated: Oct 2
If you work for yourself or are a freelancer, self-employment (SE) tax is one of the most important accounting issues you are going to run into.
As with all levels of tax compliance, getting your self-employment taxes right is very important, as there can be penalties associated with submitting an incorrect tax return.
What is Self-Employment Tax?
Self-employment tax is a combination of Medicare and Social Security taxes, like the ones you have withheld on your paycheck as a W2 employee When you receive your W2 from your employer, there are 3 boxes of taxes withheld:
Social Security (6.2%), and
Medicare taxes (1.45%).
For Social Security and Medicare, your employer matches your amount and must pay both your share and their share to the IRS.
When you are a self-employed individual you are the employer AND the employee. Therefore, you are now responsible for paying both shares of Social Security and Medicare taxes. Self-employment taxes are a combination of both Social Security (12.4%) and Medicare Taxes (2.9%) – 15.3%.
Social Security (6.2% for employee) + Social Security (6.2% for employer) = 12.4%
+ Medicare taxes (1.45%for employee) + Medicare taxes (1.45% for employer) = 2.9%
=15.3% Self-Employment Taxes
Who Must Pay Self-Employment Tax?
You are required to pay self-employment tax if:
Your net earnings from self-employment were $400 or more; or
You had a church employee income of $108.28 or more.
The definition of self-employed is slightly different from your typical understanding of employment. Self-employment is any activity for which you receive income. This also includes unincorporated businesses such as babysitters, landscapers, hair stylists, freelancers, etc.
Self-employment can include:
working as a sole proprietor, such as a consultant or independent contractor;
being a partner in a partnership
or being paid as a household employee.
Self-Employment Tax Rate
Self-employment tax payment is based on your net earnings from self-employment, which is calculated as a percentage of the total income you received from all sources. Income taxes and business income are two completely different things, so it is important to distinguish the two. As always working with a Tax Expert is always encouraged.
As discussed above, self-employment taxes are a combination of both Social Security (12.4%) and Medicare Taxes (2.9%) – 15.3%.
If your self-employment earnings are less than $400, self-employment tax is $14 per quarter.
Self-Employment Tax Deduction
You are allowed a deduction for self-employment taxes. The deduction reduces your self-employment income by 50% of the self-employment taxes. This deduction is before applying the tax rate. Imagine for a moment your net income from self-employment is $100,000. The self-employment tax would be $15,300 ($100K * 15.3%). You Self-Employment Tax Deduction would be $7,650 ($15,300 * 50%). That could potentially be an $1836 tax savings based on your personal tax bracket of 24%.
Self-Employment Health Insurance Tax Deduction
One of the most rarely used deductions is the Self-Employment health insurance deduction. Self-employed taxpayers can write off health insurance premiums. That includes premiums for medical, dental, and long-term care.
Family Caregivers and Self-Employment Tax
A family caregiver is defined as someone who performs in-home services for elderly or disabled individuals. There are special taxation rules around Family Caregivers and a full breakdown of them can be found here.
Some important aspects to consider as a caregiver include:
Family caregivers do not owe self-employment tax on amounts received from an insurance company to provide care if they are not engaged in a trade or business of providing caregiving services.
Family caregivers do not owe self-employment tax on amounts received from state agencies to provide care if they are not engaged in a trade or business of providing caregiving services.
How to Pay Self-Employment Tax
Once your self-employment taxes have been calculated it's important to know how to pay your self-employment tax.
The simplest way is to estimate and pay the self-employment tax quarterly. The self-employed are required to pay self-employment tax on their earnings quarterly but they can estimate what that liability will be each year and withhold the appropriate amount from their earnings.
Self-employment taxes are due April 15th on form 1040, personal tax return.
Get the Help You Need
If you are struggling with your self-employment taxes, contact MyAccountingCrew.com today to receive professional tax guidance from a market-leading virtual accounting firm.