Self-employed people like freelancers, independent contractors, small business owners, and others pay the self-employment tax on their net earnings. It is used to collect taxes from self-employed people for Social Security and Medicare. The amount you owe for these two taxes is the same as the self-employment tax.
Because employers are required to pay half of their employees' Social Security and Medicare taxes, the self-employment tax is higher than the taxes you pay when you are employed by another person. Since you work for yourself, you have to pay the whole amount yourself.
The Rate of Self-Employment Tax
By federal law, the tax rate for self-employed people is 15.3% of their net income. This rate is the sum of the Social Security tax of 12.4% and the Medicare tax of 2.9%. For 2023, self-employed people only have to pay Social Security tax on the first 160,200 dollars of their net income.
Furthermore, no matter how much you earn, you must pay the Medicare tax. If your net earnings are more than $200,000 for single filers or $250,000 for joint filers, then an additional 0.9% Medicare tax will also be charged.
When Do I have to Start Paying Self-Employment Tax?
The self-employment tax is typically waived for those with annual net earnings from self-employment of $400 or less. Moreover, if you have income from employment but your employer withheld no payroll taxes, you will not be charged with the self-employment tax on that income. However, like other forms of income, they will be subject to taxation.
There are also uncommon situations where you may be required to pay the self-employment tax—for example, a U.S. citizen working for a different government and church employee with an annual earning of over 108.28$ will still be required to pay the self-employment tax.
How to Find Out the Amount You Need to Pay
Using IRS Form Schedule C, compute your yearly net income. Fill out the form with your gross income before deducting any legitimate company expenses. The next step is to calculate your self-employment tax using IRS Schedule SE. You are allowed to reduce your net income by 7.65% before calculating the tax. This is authorized by the IRS.
Find Out When You Need to Pay
Estimated tax payments must be filed on a quarterly basis throughout the year to cover the self-employment tax. The Internal Revenue Service (IRS) may add a penalty fee if you don't pay the tax by the following April, as that is when your yearly tax is expected to be returned.
You can submit vouchers using IRS Form 1040-ES or make quarterly payments through the Electronic Federal Tax Payment System. For a job well done, consult a tax professional to conduct the self-employment tax calculation and payment correctly.
Reporting the Self-Employment Tax
To report the tax, include both Schedule C and SE with your Form 1040 filing to the IRS. Then fill out the "Other Taxes" section of Form 1040 with the self-employment tax amount owed. On this form, you can claim half the self-employment tax as it will count as an income tax deduction.