Self-Employment Tax

What is the Self-Employment Tax?

Self-Employment Tax is the tax towards Social Security and Medicare, required to be paid by a self-employed individual person (i.e. sole proprietors, contractors and freelancers) who has net earnings of $400 or more for the concerned tax period towards the federal government and such tax is reported through the file of Form 1040 Schedule SE.

Self-Employment Tax Rate

The Self-employment tax has two components – Social Security Tax & the Medicare Tax. The basic tax structure is 12.4% for Social Security Tax & 2.9% for Medicare Tax, making it a total of 12.4+2.9= 15.3%

The Social Security tax also has two components – The employer pays social security tax of 6.2% & the employee pays social security tax of 6.2%. Thus, the self-employed person is required to pay for both rates. This makes the total social security tax rate as 12.4%.

The breakup of the self-employment tax is available with the following table:

Rate 1

However, not the whole of net earnings is liable for the 15.3% self-employment tax rate. The first $ 137,700 is liable for social security tax only. Amount beyond $ 137,700 is liable for both social security tax as well as Medicare tax.

However, you are required to pay 0.90% for Additional Medicare in case the total earnings exceed $200,000 (in case of single filer) or exceed $250,000 (in case of joint filer).

Rate 1-1

In case additional Medicare tax is considered, the total Medicare tax becomes 2.9 + 0.9 = 3.8% in some instance. In that the employment tax reaches 15.30+0.90= 16.20%

How to Calculate Self-Employment tax?

You can download this Self Employment Tax Excel Template here – Self Employment Tax Excel Template

Example #1

Self-Employment Tax Example 1

Solution:

Self-Employment Tax Example 1-1

Example #2

The TaxpayerTaxpayerA taxpayer is a person or a corporation who has to pay tax to the government based on their income, and in the technical sense, they are liable for, or subject to or obligated to pay tax to the government based on the country’s tax laws.read more has provided the following details:

Self-Employment Tax Example 2

Solution:

Self-Employment Tax Example 2-1

Deduction of Self-Employment Tax

IRS has logically framed the self-employment taxation system by allowing the business-related expenses to deducted from the earnings. The tax deductions have been specified as follows:

  • Deduction for home office
  • Deduction for health insurance premiums
  • Meals
  • Travel
  • Interest expense
  • Business Insurance
  • Start-up costs
  • Retirement Plan contributions
  • Rental cost
  • Education
  • Advertising
  • Vehicle use

How to Pay Self-Employment Tax?

If you are sure to earn more than $ 400 a year, you should apply for a social security number (SSN) or taxpayer-identification number or an employer identification number. These numbers help the federal government to identify you easily. Then, you would require the following forms.

  • Form 1040-SR to quantify the benefits under social security programs.
  • Form 1040 (Schedule SE) to report your self-employed earnings.
  • Form 1040 (Schedule C) to report the net income or loss
  • Form 8959 to determine the liability for Additional Medicare Tax
  • Form 1040-ES to pay for the estimated tax
  • The payment for the taxes can be made through any of the available methods:
  • The most convenient & reliable method “IRS2Go Mobile Application.”
  • Online payment through the website
  • Wire transfer through a bank account
  • The EFTPS (i.e. Electronic Federal Tax Payments System)
  • Through cash with some additional fee
  • Through check with your details such as name, tax identification number & the year for which tax is being paid.

Benefits

self-employment-tax

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  • Self-employment tax shows the sensitivity of the person towards the society.
  • It builds the nation with a higher quality of infrastructure.
  • The government can fund the expenses of a needy person through such a collection.
  • The tax rate is also the average and nominal.
  • Computations are easy for a layman with no ambiguities.
  • The individual is helping to build the nation.

Drawbacks

Recommended Articles

This has been a guide to self-employment tax and its definition. Here we discuss example, rate, who should pay and how to calculate self-employment tax along with its deduction and benefits. You may learn more about financing from the following articles –