Self-employment Tax: A Full Guide for 2024

what is self-employment tax

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.

Key Takeaways

  • Self-employment tax is mandatory if you earn more than $400 from working for yourself within a calendar year.
  • The current self-employment tax rate is 15.3% – a combination of 12.4% for Social Security and 2.9% for Medicare.
  • Self-employed individuals are responsible for paying their own taxes which includes calculating the correct rates and meeting the deadlines.
  • You make estimated tax payments on a quarterly basis using Form 1040-ES.
  • You can claim a deduction for 50% of your self-employed tax on your income tax return.

What is Self-Employment Tax?

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.

Who has to pay self-employment tax?

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:

  • Independent contractors and freelancers
  • Gig workers
  • Small business owners

Self-Employment Tax vs Income Tax

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.

How Much is Self-Employment Tax in 2024?

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.

How to Calculate Self-Employment Tax

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.

Social Security Thresholds

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 Thresholds

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:

  • $200,00 – A single person, the head of the household, or a widow(er) with dependent children
  • $125,000 – Married people who file separately
  • $250,00 – Married people who file jointly

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.

How to Pay Self-Employment Tax

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:

  1. Estimate your taxes – Use Form 1040 ES to determine how much you expect to earn and therefore how much self-employment tax you’ll have to pay. If it’s your first year, you’ll have to make reasonable projections. In subsequent years, you’ll have to base your estimates on past earnings and include your previous tax return.
  2. Complete the vouchers – The form includes four vouchers, one for each tax quarter. Write the projected amount along with your personal details.
  3. Decide how to submit your paperwork – You can post vouchers to the relevant address for your state (stated on page five of Form 1040 ES) or use the IRS portal, EFTPS (Electronic Federal Tax Payment System).
  4. Choose a payment method – Include a cheque or money order with postal forms. If using the electronic system, you have a choice of either direct debit or transfer.
  5. Adjust your calculations – If you under or overestimated your taxes, simply complete another Form 1040-ES with the correct figures.

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.

Self-Employment Tax Deductions

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.

Social Security

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.

Health Insurance

You can deduct all your health insurance premiums provided you meet the following conditions:

  • You made a net profit through your self-employed income.
  • You pay for your own health insurance premiums.
  • You’re not eligible for a plan through your spouse’s employer.

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.

Retirement Plan Contributions

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.

Home Office

If you regularly work from home, you may be able to claim back a portion of the following expenses:

  • Rent or mortgage payments
  • Home insurance
  • Utilities (namely water, electricity, and internet)
  • Repairs and maintenance

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:

  • Simplified method: Calculate your deduction based on how much space you use to conduct your business up to a limit of 300 square feet. The current rate is $5 per square foot.
  • Regular method: Provide a list of itemized expenses related to your home office.

You don’t have to commit to a system—you could use the regular method one year and the simplified one the next.

Travel & Vehicle Use

If you take a business trip, you can deduct the following expenses from your taxes:

  • Mileage
  • Vehicle hires
  • Public transport fares
  • Accommodation

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.

Conclusion

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.

FAQs

What is considered self-employment tax?

Do I have to pay social security tax on my side gig?

How much should I set aside for self-employed taxes?

How do I calculate my self-employment tax?

Why is self-employment tax so high?

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Rhiannon Stone
Technology Writer
Rhiannon Stone
Technology Writer

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.