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Navigating self-employment tax can be challenging, especially if you’re new to freelancing. Our in-depth guide clarifies the process by answering questions like ‘what is self-employment tax’ and ‘how do you calculate it’. Continue reading to explore everything from current rates to essential paperwork and eligibility criteria for different deductions.
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Self-employment tax is a payment you’re required to make by federal law if you earn money by working for yourself. It’s a combination of the Social Security and Medicare taxes that employers typically withhold from their workers’ pay.
The tax is mandatory to ensure you still contribute toward benefits like health care and retirement plans. By making payments, you maintain crucial safety nets for times of need like during old age or if you get sick.
You’re required to pay self-employment tax if you earn $400 or more from working for yourself within a calendar year. The threshold is lower for church income at $108.28.
If you fall into one of the following categories, you generally count as self-employed:
Self-employment tax is different from income tax. It’s important to differentiate between the two types of tax as you’re required to pay both. While self-employment tax covers your Social Security and Medicare contributions, income tax addresses your general financial obligations to the US government.
The IRS (Internal Revenue Service) has set the self-employed rate at 15.3% with 12.4% allocated to Social Security and 2.9% to Medicare. You pay this tax on all wages, tips, and net earnings from working for yourself within the year.
If you earn less than $400 during this period, you’re not required to make payments. However, as soon as you exceed this threshold, you pay tax from the first dollar.
To illustrate, say you open a business and make $390 one year and $500 the next. You won’t make any payments on the first year but you’ll owe $76.50 (15.3% of $500) for the second.
Calculating self-employment tax involves determining your net income and applying the current rates. In this section, we’ll discuss how you can manage your own accounting.
By net income, we mean your total earnings from working for yourself after business expenses. You use Schedule C (Form 1040) to help you calculate your profits and losses and report them to the IRS.
Once you’ve established your net income, you apply the 15.3% tax rate. To give you an example of how to calculate self-employment tax, say you earn $100,000 after expenses in 2024. You would do the following sum:
$100,000 x 15.3% = $15,300
However, if you meet certain thresholds, you’re subject to different rates. These limits apply to your combined wages and self-employed income if you have a side gig.
Once your earnings exceed $160,200, you only have to make the 12.4% Social Security payments up to that threshold. Remember this amount includes both your wages and self-employed income. Say you take home $100,000 in wages and a further $70,000 from freelancing, you still only owe $60,200 from the latter.
You would calculate your Social Security and Medicare contributions separately and add them together.
Here are the sums you’d do if you earned $180,000:
$160,200 x 12.4% = $19,864.80 (Social Security)
$180,000 x 2.9% = $5,220.00 (Medicare)
$19,864.80 + $5,220.00 = $25,084.8
Medicare contributions work differently. If you earn over a certain amount, you have to pay an extra 0.9% on any income over that limit. Here are the thresholds for different categories:
Here’s how you’d calculate your self-employment tax as a single person who has a net income of $250,000:
$160,200 x 12.4% = $19,864.80 (Social Security)
$200,000 x 2.9% = $5800 (Regular Medicare rate)
$50,000 x 3.8% = $1900 (Additional Medicare rate)
$19,864.80 + $5800 + $1900 = $27,564.80
Note that if your situation changes, you generally file under the status you hold on December 31st of the same tax year. Hypothetically, a self-employed person who marries in January and divorces in November would file as a single person.
If you’re just looking for an estimate of your taxes, to help yourself budget correctly throughout the year, use a tool like QuickBooks’ free self-employment tax calculator.
As a self-employed individual, you pay taxes directly to the US government.
Before you can do this, you need a Social Security Number (SSN) and an individual Tax Identification Number (TIN). If you’re a foreign national and you haven’t already got these, you’ll have to apply.
You’ll find the request form for the SSN on this Social Security webpage and you can apply for the TIN using a Form W-7.
Unlike traditional employees, self-employed individuals have to predict how much tax they’ll owe and make quarterly payments. Here are the steps you can take:
When you file your tax return at the end of the year, you’ll need to include your Form 1040-ES so store it somewhere secure.
For more information on business tax overall, check out our guide on how to file business taxes.
As the gig economy continues to grow, the US government is focused on supporting self-employed individuals. They’ve introduced many deductions to alleviate the financial burden for anyone responsible for paying all their Medicare and Social Security contributions.
Understanding which tax breaks you’re eligible for could save you money and make freelancing a more sustainable option.
In this section, we’ll cover the most essential deductions to know about. You can consider others including education and supplies depending on your specific circumstances. Be aware that some deductions are temporary, under the Tax Cuts and Jobs Act, and will expire within the next few years.
If you’re used to payroll taxes from a salaried position, self-employment tax may seem high. That’s because you’re covering the employer’s half of your Social Security and Medicare contributions.
However, you can deduct 50% of the amount from your income tax. When you’re calculating your net earnings, you can treat the employer half as a business expense. That means you’re paying 7.65% rather than the full 15.3%.
You don’t have to itemize your self-employment tax to take advantage of this deduction. You just attach Schedule SE to Schedule C when you do your tax return.
You can deduct all your health insurance premiums provided you meet the following conditions:
If you pay for policies for your spouse and any dependents, you can deduct those as well. You can even cover your adult children under the age of 27 including those you have formally adopted or fostered.
You may have been ineligible for a portion of the year. You can still claim the deduction but not for those months.
The IRS provides a form to help you calculate your deductions on this instructional webpage.
You can deduct your retirement contributions provided they don’t exceed certain limits. These thresholds depend on your plan type and change every year. For example, the annual 401(k) limit is $69,000 in elective deferrals for 2024 up from $66,000 in 2023.
Catch-up payments work in a similar way. You can make additional contributions of up to $7,500 if you’re aged 50 or older. This is an increase of $1,000 from 2022 and 2021.
The full list of limitations for each plan type is available on this IRS webpage.
If you regularly work from home, you may be able to claim back a portion of the following expenses:
Ensure all expenses you claim are related to your self-employed work. During an audit, the IRS will check details like how many hours you work from home and the square feet you dedicate to your business.
There are two ways to calculate your home office deduction:
You don’t have to commit to a system—you could use the regular method one year and the simplified one the next.
If you take a business trip, you can deduct the following expenses from your taxes:
You can also deduct 50% of any non-entertainment-related meals, for example, food you have at meetings with clients or during conferences.
The travel must last longer than a standard working day and take you away from the town where you normally work. You should also engage in legitimate business activities such as meeting customers, attending conferences, or undergoing training.
Similar to the home office deduction, you may need to prove your travel was business-related. Maintaining comprehensive and accurate records will ensure audits go smoothly. As well as keeping receipts, consider saving messages with clients to show the intent of your travel was always professional.
Self-employment tax may seem daunting at first look. You have to contend with higher rates and complex legislation while you manage your business. However, the US government offers generous tax breaks to self-employed individuals to offset their extra costs. There are also extensive resources for freelancers including top accounting software and services. Once you’ve overcome the initial hurdles, you’ll find the tax system for freelancers can be very rewarding.
Self-employed tax is the Social Security and Medicare contributions an individual has to make if they work for themselves. As of 2024, the rate is 15.3%.
You have to pay social security tax on your side gig if you earn $400 or over in a calendar year. However, you only have to apply the 12.4% Social Security rate on net income up to $160,200.
You should set aside a little over 15.3% of your net income for self-employed taxes. As you have to estimate your contributions, you need to account for payments being higher than predicted.
To calculate your self-employment taxes, determine 15.3% of your net income. You should include both wages and money from working for yourself in your calculations.
Self-employment tax is so high because you’re solely responsible for making payments. When you receive a salary, your employer makes half of the contributions.
Rhiannon Stone is an experienced web content creator with over four years in the industry and graduated with an MA in English. Before she began working with Techopedia, she traveled the world teaching Business English where her students worked in sectors such as banking, manufacturing, and telecommunications. After teaching Rhiannon joined a publishing house where she started her writing career. Now, Rhiannon is based in Greece and specializes in writing in-depth reviews and thought-out comparison content within SaaS, HR, and accounting to help Techopedia readers make fully-informed choices.
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