Self-Employment Tax: How It Works & What You Owe

Self-employment tax is a major part of a self-employed individual’s IRS obligations. It includes Social Security and Medicare taxes that would otherwise be withheld from an employee’s paycheck. If you work for yourself, you are responsible for both portions.

IRS Tax Code Reference

Under Internal Revenue Code (IRC) §1401, self-employed individuals must pay:

• 12.4% for Social Security, and
• 2.9% for Medicare,
  for a total 15.3% tax rate on net earnings.

Additionally, under IRC §3101(b)(2), if net earnings exceed $200,000 (single) or $250,000 (married filing jointly), you must pay an extra 0.9% Medicare tax.

Forms involved:

• Schedule SE (Form 1040)  to calculate and report self-employment tax
• Schedule C (Form 1040)  to report business income and expenses

How Self-Employment Tax Is Calculated

Steps:

1. Calculate Net Profit
   Complete Schedule C (Form 1040) to find your net earnings.
2. Apply the Adjustment Rate
   Multiply net earnings by 92.35% to adjust for the employer-equivalent portion.
3. Apply the Tax Rate
   Multiply the adjusted earnings by 15.3% to determine self-employment tax.

Example:

• Net earnings from business: $100,000
• Adjusted amount: $100,000 × 92.35% = $92,350
• Self-Employment Tax: $92,350 × 15.3% = $14,127.55

Result: You owe $14,127.55 in self-employment tax.

Additional Medicare Tax for High Earners

If your earnings exceed the IRS threshold, an additional 0.9% Medicare tax applies only to the income above $200,000 ($250,000 for married filing jointly).

Step-by-Step Compliance Checklist

1. Prepare Schedule C to compute net profit.
2. Complete Schedule SE to calculate self-employment tax.
3. Report the tax on Form 1040, Line 23.
4. Deduct 50% of the self-employment tax on Form 1040, Line 13.
5. Make quarterly estimated tax payments if you expect to owe at least $1,000.

Conclusion

Calculating and paying self-employment tax is a non-negotiable IRS requirement if you are self-employed. Accurate bookkeeping and timely estimated tax payments are essential to avoid IRS penalties and interest.

To avoid miscalculations or missed payments, it is advisable to seek professional assistance.

Schedule a meeting today with CPA Anshul Goyal for customized self-employment tax planning:
https://calendly.com/anshulcpa/

FAQs

Q1: Is self-employment tax different from income tax?
Yes. Self-employment tax covers Social Security and Medicare, separate from federal income tax.

Q2: Can I deduct self-employment tax?
You can deduct 50% of your self-employment tax as an adjustment to income.

Q3: When am I exempt from self-employment tax?
If your net self-employment income is under $400 for the year.

Q4: Does self-employment tax apply to part-time work?
Yes, any net earnings over $400 are subject to self-employment tax.

Q5: How do I pay self-employment taxes?
Through quarterly estimated tax payments using Form 1040-ES.

About Our CPA

Anshul Goyal, CPA, EA, FCA, is a licensed Certified Public Accountant in the United States. He is admitted to practice before the IRS as an Enrolled Agent and represents clients in tax litigation. As a cross-border tax expert, Anshul assists American businesses and Indian individuals living in the U.S. with IRS compliance, tax planning, and structuring.