The Internal Revenue Service imposes an additional tax on self-employment income. Most people pay the Social Security tax and Medicare tax by income withholding through their employer. However, self-employed individuals have no employer so they must calculate these taxes on their own. Self-employment income includes money that you earn as an independent contractor or from working for your own business. These taxes must be calculated separately from your regular federal income taxes.
Use Schedule C to calculate your net self-employment income. Only your net income, rather than your income before deductible expenses, such as advertising and supplies, is subject to the self-employment tax.
Multiply your net self-employment income by 0.9235 to calculate the portion of your income subject to the self-employment tax. For example, if you have $70,000 in self-employment income, you would multiply $70,000 by 0.9235 to get $64,645.
Compare your income subject to the self-employment tax from step 2 to the annual limit for the Social Security tax, which can be found on IRS Schedule SE. If the total exceeds the annual limit, multiply your total income by the Medicare tax rate and add the maximum Social Security tax to calculate your total self-employment tax. For example, for 2010 the Social Security tax applies to the first $106,800 of your income so if you had $200,000 in self-employment income, you would multiply $200,000 by 2.9 percent (the 2010 Medicare tax rate) to get $5,800 and then add $13,243.20 to find your total self-employment tax would be $19,043.20. If your total does not exceed the annual limit for the Social Security tax, you would multiply your income subject to the self-employment tax by the total self-employment rate. Continuing the example from step 2, you would multiply $64,645 by 0.153 to find your total self-employment tax would be $9,890.69.
You can deduct half of your self-employment taxes from your income tax as an adjustment to income.
- You can deduct half of your self-employment taxes from your income tax as an adjustment to income.
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."