If you have net self-employment income of $400 or more, you’re responsible for paying not only income taxes on those earnings, but also self-employment tax. The self-employment tax is comprised of two distinct taxes, the Social Security tax of 12.4 percent and the Medicare tax of 2.9 percent, for a total of 15.3 percent. The self-employment tax mirrors the FICA taxes imposed on employee income, except that when you’re self-employed, the rates appear twice as high because you’re paying both the employer and the employee portion of the tax.
SE Tax Formula
To calculate how much self-employment tax you owe, you first need to calculate your net self-employment income by subtracting deductible expenses from your gross receipts on Schedule C. Once you have your net self-employment income, you can calculate your self-employment tax using Schedule SE. First, multiply your net self-employment income by 0.9235, since only 92.35 percent of self-employment earnings are subject to these taxes.
Then, if your total earned income for the year is less than the contribution and benefit base for the year, multiply the result by the combined Social Security tax and Medicare tax rates to calculate your self-employment tax. For example, if you have $58,000 of net self-employment income as your only earned income for the year, multiply $58,000 by 0.153 to find you owe $8,874 of self-employment tax.
Contribution and Benefit Base
The Medicare portion of the self-employment tax applies to all of your self-employment income, regardless of how much you make, but the Social Security portion only applies to self-employment income up to the annual contribution and benefit base. So, any self-employment income in excess of the contribution and benefit base is exempt from the Social Security portion of the self-employment tax.
To calculate your self-employment tax when your earnings exceed the contribution and benefit base, first calculate your self-employment income subject to SE tax by multiplying by 0.9235. Then, multiply the smaller portion of your self-employment income needed to reach the contribution and benefit base by 0.124, the Social Security tax rate. Next, multiply your self-employment income by 0.029, the Medicare tax rate. Finally, add the two together to calculate your self-employment tax.
For example, say you have a $100,000 salaried job and your net self-employment income is $45,000 in a year when the contribution and benefit base is $128,400. First, multiply $45,000 by 0.9235 to get $41,557.50. Then, because you only need $28,400 after your $100,000 salary to reach the contribution and benefit base, multiply $28,400 by 0.124 to find you’ll owe $3,522 for the Social Security portion. Next, multiply the entire $41,557.50 by 0.029 to find you’ll owe $1,205 for the Medicare portion. Finally, add $3,522 plus $1,205 to find your total SE tax is $4,727.
2018 Contribution and Benefit Base
For 2018, the contribution and benefit base for the Social Security portion of the SE tax is $128,400. So, you won’t have to pay the Social Security portion of the tax on earned income in excess of that amount.
Reduce Your SE Tax
Since you pay self-employment tax on your net business income, taking advantage of as many deductions as possible to reduce your business income can help save you some money on taxes. Self-employed individuals can deduct qualified expenses for advertising, utility bills, travel, home office use, depreciation, office supplies, training and insurance premiums from their gross business income to arrive at a lower net income that will be taxed.
If your business has just started up, you can also take advantage of up to a $5,000 deduction for your business's start-up costs. In addition, contributions to a self-employed retirement plan, including IRAs and 401(k)s, are deductible up to a limit of $18,500 for the 2018 tax year ($19,000 for 2019), and the limit rises to $24,500 for those at least 50 years old ($25,000 for tax year 2019).
- IRS: Topic Number 554 - Self-Employment Tax
- Social Security Administration: Contribution and Benefit Base
- Social Security Administration: FICA and SECA Tax Rates
- Self-Employment Tax (Social Security and Medicare Taxes) | Internal Revenue Service
- Intuit QuickBooks: Complete List of Self-Employed Expenses and Tax Deductions
- If you owe the self-employment tax, the IRS has traditionally allowed you to deduct half the amount from your income taxes, representing the equivalent of the employer portion of FICA taxes. However, in 2011, the employee portion of Social Security tax equals 6.2 percent while the employee portion equals 4.2 percent, so the IRS may allow you to deduct the employer portion rather than splitting it in half because the employee and employer portions are no longer equal.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."