The self-employment tax isn’t a unique tax that’s entirely different from anything employed persons must pay, and it’s not a penalty for working for yourself – at least not exactly. It’s FICA taxes: Social Security and Medicare. When you are employed by someone else, you pay half these taxes, and your employer pays the other half. However, when you’re self-employed, you are your employer, so you must pay both halves.
FICA Tax Rates
As of 2018, the Social Security part of the self-employment tax is 12.4 percent. If you were employed by someone else, you would pay 6.2 percent and your employer would pay 6.2 percent on your behalf. Medicare is an additional 2.9 percent: 1.45 percent normally paid by the employee plus 1.45 percent paid by the employer. Your total self-employment tax works out to 15.3 percent of your net earnings.
The Social Security portion of the self-employment tax caps out at incomes of $128,400 in 2018. Anything you earn over this amount is subject only to the Medicare portion of the tax.
Additional Medicare Tax
If you earn more than $200,000, the Additional Medicare Tax kicks in, and this is the same for both employed and self-employed individuals because employers don’t have to match it. It’s 0.9 percent of anything you earn over this amount, regardless of your filing status. The Additional Medicare Tax isn’t part of the self-employment tax, but if you earn this much, you don’t want to forget to account for it.
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Calculating Your Taxable Income
Now here’s a bit of good news. The self-employment tax isn’t assessed against all your earnings but only against your net earnings – your gross earnings less your business expenses. You calculate your net earnings on IRS Schedule C. After you subtract your business expenses, the balance is subject to the self-employment tax as well as income tax.
The IRS says that your business expenses must be “ordinary and necessary.” If you’re a plumber, you can’t purchase ballet shoes and expect to deduct their cost on Schedule C because plumbers don’t ordinarily dance when they’re performing their trade. The expense must be shared by most other people who work in the same field you do and must be appropriate for your business.
Now here’s more good news: If your net self-employment income is less than $400 because it’s something you do on the side in addition to your regular job, you don’t owe any self-employment tax at all.
Calculating the Self-Employment Tax
The easiest way to calculate what you owe in self-employment tax is first to multiply the net income you arrived at after completing Schedule C by 92.35 percent. Then multiply the resulting number by 7.65 percent.
This might not make much sense at first glance, but it’s how it works out when you complete your 1040 tax return because the Internal Revenue Code kindly allows you an above-the-line tax deduction equal to one-half of your self-employment tax. You’re effectively getting one-half of the tax back, which is why your net income is reduced by 7.65 percent – one-half of the total 15.3 percent in Medicare and Social Security tax that you have to pay yourself because you don’t have an employer.
You can also multiply your entire net income by the whole 15.3 percent, then subtract half the resulting number.
- Bankrate: Self-Employment Tax Calculator
- Oblivious Investor: How to Calculate Self-Employment Tax
- IRS: Self-Employed Individuals Tax Center
- TurboTax: The Self-Employment Tax
- Journal of Accountancy: Social Security Administration Announces Small Increase in 2018 Wage Base
- IRS: Topic Number 751 – Social Security and Medicare Withholding Rates
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