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4 Simple Steps to Calculate Your Self-Employment Tax

Woman standing at a desk typing on her computer while holding a phone and calculating her taxes

Taxes are a hard reality of life for workers everywhere. Anyone with a paycheck recognizes the difference between what they earn outright and what they bring home after taxes. That difference comes from income tax withholdings and other payroll taxes.

If you are self-employed, you do not get a paycheck, so you have no automatic withholdings. It is your responsibility to calculate and pay your own payroll taxes, which are distinct from income tax.

What is the Self-Employment Tax?

The self-employment tax, also known as the Self-Employment Contributions Act (SECA) tax, is a combination of the Social Security tax and the Medicare tax. In general, the Social Security tax is 12.4% and the Medicare tax is 2.9% of net earnings.

When employees work for a bona fide business, these are payroll taxes that the employer and the employee normally split. If you are self-employed, that means you are both the employer and the employee and are therefore entitled to pay both halves.

Who Should Pay Self-Employment Taxes?

Anyone who earns $400 or more from self-employment must pay self-employment taxes. The only exceptions are people who earn money working for a church, who must pay self-employment taxes if they earn more than $108.28.

If you draw some self-employment income but also have another job working for an employer, you must still pay self-employment taxes on your self-employed earnings. The government considers the following people to be self-employed:

  • Independent contractors 
  • Sole proprietors
  • Owners of a single-member LLC
  • Active members of partnership LLCs (but not passive members or investors)
  • Members of partnerships that carry on business or trades

How to Calculate Self-Employment Taxes

Self-employment taxes are calculated based on your net income, which is your gross income from self-employment minus business expenses. For many people, this is 92.35% of their net earnings from self-employment.

To calculate self-employment taxes, you should first use IRS Schedule C to calculate your net earnings. Then use IRS Schedule IE to calculate your self-employment taxes.

For 2020, only the first $137,700 of your income from all sources, not just self-employment, is subject to the Social Security tax. There is no such limit for the Medicare tax. Taxpayers filing a single tax return who make more than $200,000, as well as taxpayers filing a joint tax return who make more than $250,000, must pay an additional 0.9% Medicare tax.

How to Pay Self-Employment Taxes

When it comes to taxes, you probably think of the income tax you pay in April. That is not true for self-employment taxes. Many people who are self-employed should make estimated quarterly tax payments or face late-payment penalties in April. 

You must pay estimated quarterly taxes if:

  • You will owe more at least $1,000 in federal income tax, OR
  • Your refundable credits and withholding will cover less than 90% of this year’s tax liability or 100% of last year’s liability, whichever is smaller.

To pay your self-employment taxes, you need a Social Security number or an independent taxpayer identification number (ITIN).

Self-Employment Tax Deductions

If you are self-employed, you can claim two major types of tax deductions: business expenses and self-employment taxes. Both deductions reduce your total taxable income, which reduces how much you will pay in self-employment taxes and income tax.

Business expenses are expenses related to your business that the IRS considers “ordinary” and “acceptable.” These expenses must be common, accepted, helpful, and appropriate for your business to qualify as deductions. If you plan to take deductions, keep careful track of business-related expenses. The self-employment tax deduction is a deduction of 7.65% of your self-employed income. This amount is half of the total Federal Insurance Contributions Act (FICA) tax that W-2 employees pay with each paycheck.

Employers can deduct the portion of the FICA tax that they pay for each employee, so this deduction is the equivalent for self-employed workers. This deduction is the reason that most self-employed workers pay taxes on 92.35% of their net income.

If you are still wondering how to calculate self-employment tax, reach out to the payroll services team at Expert Payroll LLC. They have helped many self-employed workers manage their self-employment taxes and they can help you, too. Call (760) 421-5334 today.

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