What Are Self-Employment Taxes?

When you work for an employer, both you and your employer pay Social Security and Medicare taxes. Your employer pays half and you pay half, which is taken out of your check every payroll period (See my blog about payroll taxes). When you are self-employed you are responsible for paying all of these taxes yourself along with estimated income tax, and most likely on a quarterly basis. If you estimate that you will owe at least $1000 in federal income taxes or your withholdings won’t cover at least 90% of what you will owe, you should be paying estimated quarterly taxes. So let’s dive into how to figure out this tax.

First you will want to estimate your net earnings for the year. If you’re not sure what that number is going to look like, you can use your net earnings each quarter and pay estimated taxes on those figures. To get net earnings you take your gross earnings and deduct business expenses. (remember: business meals are only 50% deductible and entertainment expenses are not deductible.) Next, you will take that number and multiply it by 92.35%. You will then take that answer and multiply it by 15.3%. This is your self-employment tax. Let’s do an example:

I ran a hotdog stand and here are my financials for the first quarter (January, February, and March):

Sales: $9000.00

Food Costs: ($2000.00)

License Fees: ($50.00)

Marketing ($100.00)

Supplies ($60.00)

___________________

Net Earnings = $6790 x .9235 = $6271 x .153 = $959 self-employment tax

(Side Note: To figure out your estimated income tax use Form 1040ES. This amount will need to be paid in addition to the self-employment tax)

Now, there are a few more additional rules to consider with the self-employment tax. First, you only pay Social Security tax (12.4% of the 15.3%) on the first $142,800 (for 2021) of earnings. Any earnings in excess of that number are not taxed for Social Security; just Medicare. Second, if your net earnings exceed $200,000 if single or $250,000 if married, an additional 0.9% Medicare tax is applied to amounts in excess of those numbers. For example:

Let’s say my net earnings were $310,000 and I am married.

$310,000 x .9235 = $286,285 so $142,800 x .124 = $17,702 Social Security tax (threshold)

$286,285 x .029 = $8302 Medicare tax

$286,285 - $250,000 = $36,285 x .009 = $327 additional medicare tax

____________________________

Total self-employment tax = $26,331

So now you know how to calculate the self-employment tax and when to pay it. Before you start shedding some tears there is some good news. When it comes time to file your income taxes at the end of the year you will be able to deduct half of your self-employment tax that you paid and you may qualify to take the qualified business income deduction which can equal up to 20% of your net income. Feel free to contact me with any additional questions you may have about this tax in the comments.