You’re responsible for paying not only income taxes on those earnings, but also the self-employment tax if you have net self-employment income of $400 or more. The self-employment tax is comprised of two 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 the rates appear twice as high when you're self-employed because you’re paying both the employer and the employee portions of the tax.
Read More: What Are Self-Employed Taxes?
Self-Employment Tax Formula
You must first calculate your net self-employment income to figure out how much self-employment tax you owe. Subtract your deductible business expenses from your gross receipts on Schedule C. You can calculate your self-employment tax using Schedule SE when you have your net self-employment income. First, multiply your net self-employment income by 0.9235, since only 92.35 percent of self-employment earnings are subject to these taxes.
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, multiply $58,000 by 0.153 (15.3 percent) to find that you owe $8,874 of self-employment tax if you have $58,000 in net self-employment income for the year.
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 earn, but the Social Security portion applies only to self-employment income up to the annual contribution and benefit base. Any self-employment income in excess of the contribution and benefit base is exempt from the Social Security portion of the self-employment tax.
The base is $142,800 in 2021, up from $137,700 in 2020 because it's adjusted annually for inflation. You'd use the 2020 figure to calculate the tax you owe on the return you file for the 2020 tax year in 2021. You won’t have to pay the Social Security portion of the tax on earned income in excess of $137,700.
Read More: When Can I Stop Paying Social Security Tax?
First calculate your self-employment income subject to the self-employment tax by multiplying your Schedule C income by 0.9235 if your earnings exceed the contribution and benefit base. 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. Finally, multiply your self-employment income by 0.029, the Medicare tax rate. Add the two together to calculate your self-employment tax.
For example, let's say you had a $100,000 salaried job and your net self-employment income was $45,000 in 2020 when the contribution and benefit base is $137,700. Multiply $45,000 by 0.9235 to get $41,557.50. You only need 37,700 after your $100,000 salary to reach the contribution and benefit base. Multiply $37,700 by 0.124 to find that you’ll owe $4,675 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 $4,675 and $1,205 to find your total SE tax is $5,880.
Reduce Your SE Tax
You pay self-employment tax on your net business income, so taking advantage of as many business deductions as possible will reduce your business income and 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.
Read More: Self-Employed Tax Deductions, Benefits & More
You can also take advantage of up to a $5,000 deduction for your business's start-up costs if your business has just gotten off the ground. In addition, contributions to a 401(k) retirement plan are deductible up to a limit of $19,500 for the 2020 and 2021 tax years, and the limit rises to $26,000 for those at least 50 years old.
- IRS: Topic Number 554 - Self-Employment Tax
- Social Security Administration: Contribution and Benefit Base
- Social Security Administration: FICA and SECA Tax Rates
- Intuit QuickBooks: Complete List of Self-Employed Expenses and Tax Deductions
- Social Security Administration: If You Are Self-Employed
- IRS: Retirement Plans for Self-Employed People
- IRS: Publication 535 (2020), Business Expenses
- 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."