Understanding & Calculating Self-Employment Tax: Everything You Need to Know

Tax season is overwhelming as it is…but when you’re liable for paying self-employment taxes, stress takes on a whole new meaning. Whether you’re newly self-employed or eager to learn how to better plan for self-employment taxes, this post is for you. We’re answering the most important questions about self-employment taxes, showing you how to calculate what you owe, and providing helpful tips and resources to get you through the stresses of tax season.

Looking for an answer to a specific self-employment tax question? Use the links below to navigate or read all the way through for a comprehensive overview of self-employment taxes.

• What is Self-Employment Tax?
  • What is the self-employment tax rate?
  • Who pays self-employment taxes?
  • Why are self-employment taxes so high?
  • Do self-employment taxes vary by state?
• How to Calculate Self-Employment Taxes
  • How much tax do you pay if you are self-employed?
  • Can I reduce my tax liability as a self-employed taxpayer?
• How to File Self-Employment Taxes
• Penalty for Late or Unfiled Self-Employment Tax
• Get Self-Employment Tax Help

What is Self-Employment Tax?

If you’ve ever been a W-2 employee, you’re probably familiar with this scenario: as you anticipate your first paycheck, you decide to calculate your monthly income based on your hourly wage or salary. You can’t wait to spend your hard-earned cash after you’ve made your calculations. But when your paycheck arrives, there’s something missing. Upon further research you discover the culprit: state and federal withholdings.

These subtractions from your paycheck automatically cover a percentage of the taxes you owe to both the federal government and the state in which you live, including your FICA taxes, which are your contribution to the Federal Insurance Contributions Act. This is how taxpayers pay into federally-funded insurance programs like:

• Social Security 
• Medicare

Self-employment (SE) taxes are how self-employed taxpayers pay their contribution of FICA taxes, since they do not have taxes withheld from their paychecks.

For standard (W-2) employees, their employers are required to contribute half of their FICA tax rate; but since self-employed taxpayers are employed by themselves, they must pay both their part of FICA taxes as well as that of their employer’s.

To boot, self-employed income is not subject to tax withholding which means that self-employed taxpayers have to pay:

• their portion of FICA taxes 
• the employer portion of FICA taxes 
• Federal government taxes

We’ll discuss how that works a little later.

What is the self-employment tax rate?

The self-employment tax rate is 15.3%. This rate is made up of the self-employed taxpayer’s FICA tax contribution (12.4% for Social Security and 2.9% for Medicare).

Has the self-employment tax rate increased over the years? According to the Bradford Tax Institute, the self-employment tax rate has not changed since 1989 when self-employed taxpayers were taxed at a rate of 13.02% (10.12% for Social Security and 2.9% for Medicare).

Who pays self-employment taxes?

Anyone who the IRS considers to be self-employed and makes more than $400 in net earnings from self-employed income will need to pay SE taxes. According to the IRS, you are considered ‘self-employed’ if you fall into any of these categories:

Independent contractors

Independent contractors are more commonly referred to as freelancers. They’re typically hired on by a company or organization to provide their services for a predetermined period of time. Examples of independent contractors include: freelance artists, writers, designers, accountants, and hair stylists.

Sole proprietors

Many small businesses elect ‘sole proprietorship’ when they register their business license. Sole proprietorships are considered pass-through entities in the eyes of the IRS, meaning that the business owner will absorb all taxes due to the IRS and the entity itself will not be taxed. One tax they’re responsible for is self-employment taxes. Examples of sole proprietorships include: a local grocery store, a small landscaping company, or tutoring services.

Additionally, if your multi-partner LLC is treated as a ‘partnership’ for federal tax purposes, you will be considered a sole proprietor, and therefore, need to pay self-employment taxes.

Church employees

If you’re employed by a church organization and have been paid more than $108.28 over the last tax year, you will be required to pay self-employment taxes, unless you are personally exempt by the IRS.

Why are self-employment taxes so high?

15.3% can seem like a pretty big dig when you look at the number without context. But, self-employment taxes are paid on net income, which can be reduced by claiming self-employed tax deductions and credits.

Do self-employment taxes vary by state?

Self-employment taxes are mandated by the federal government because Social Security and Medicare are federal insurance programs. This means your self-employment taxes will remain the same, no matter which state you live in.

However, each state and local government have their own jurisdiction over income tax rates, so you’ll need to check with

How to Calculate Self-Employment Taxes

Now that you know why self-employment taxes are required and what rate they’re taxed at, let’s talk about how you can calculate your self-employment taxes so that you can budget for them throughout the year, and file them correctly when tax season is in swing!

To calculate your self-employment taxes:

• Start with your total earnings made during the year you’re filing self-employment taxes, found on Form(s) 1099 from each client that paid you $600 or more during the last year
• Take your total earnings and multiply that number by the amount of your income that’s subject to self-employment (SE) taxes, 92.35%, to find your taxable income
  • Why 92.35%? That’s because 7.65% of your income can be deducted to account for the employer’s half of the FICA tax. Businesses are able to deduct the same amount on their taxes for contributing to FICA, so it’s only fair that the IRS allows self-employed taxpayers to do the same.
• Multiply your taxable income by the self-employment tax rate, 15.3%

Got your final number? That’s what you can expect to pay in self-employment taxes this year!

If this number sounds scary, be sure to use tax deductions and credits to lower your tax liability on your income taxes.

How much tax do you pay if you are self-employed?

It depends on your annual earnings. You can use the SE tax formula discussed above to help you figure out your current tax liability and help you budget for upcoming tax years based on your income history. Keep in mind self-employment taxes only account for part of your total tax liability. In addition to self-employment taxes, you will also be required to pay federal and state income taxes, among other local and state-mandated taxes including state and use tax.

Can I reduce my tax liability as a self-employed taxpayer?

So far, most of this news has been a little frightening to those awaiting their self-employment tax bill. In fact, in a study from Upwork, 24% of freelancers said facing higher taxes was the main reason they decided not to freelance full time.

Take Advantage of Self-Employed Tax Deductions

The good news is, there are plenty of self-employment tax deductions that can be claimed on your tax return if you want to lower your tax bill. Some of the most common self-employment tax deductions include:

• Home office, whether it’s a designated room or simply a corner of your home  
• Internet and cell phone 
• Health insurance premiums 
• Software and technology costs
• Advertising expenses

By claiming these deductions on your annual tax return, you can lower your taxable income. Your taxable income determines how much the state and federal governments tax you. Generally, the higher your taxable income is, the more taxes you’re subject to pay.

The federal government has seven different income tax rates that range from 10% to 37% of adjusted gross income (AGI). With enough deductions, you may be able to be taxed at the lower end of the spectrum rather than toward the top. Note: In order to claim deductions and tax credits, taxpayers should have supporting documentation to support their claim.

As far as state income taxes go, they have their own thing going. Some charge a flat rate for all taxpayers in the state while others use a bracket system similar to the U.S. government. State deductions are not the same as federal ones, so the ones we discussed above are not likely to appear on your state tax return as well. Quick! Take advantage of the self-employment deductions while you can!

How to File Self-Employment Taxes

When employee basis taxpayers receive their paycheck each period, there is generally a certain amount of money withheld to account for FICA taxes and state taxes. You can think of this as a ‘pay-as-you-go’ sort of system. For self-employment taxes, the system is pretty much the same, except for the inconvenience of having to figure your taxes on your own instead of having your employer withhold them for you. This is known as the estimated tax system.

Estimated taxes are due on a quarterly basis (April 15th, June 15th, September 15th, and January 15th).

To file your estimated taxes, you’ll need:

• The current year’s self-employment tax form 1040-ES
• The form you filed last year
• The items included on this tax prep checklist 

Estimated tax payments should be made on a quarterly basis using IRS-approved payment methods:

• Pay online
• Pay by phone
• Pay by mail

In addition to filing federal SE taxes, your state may also require you to pay income taxes on a quarterly basis. Consult your state’s Department of Revenue or enlist the help of a tax preparation specialist to make sure you’re on the right side of your state’s tax regulations.

Penalty for Late or Unfiled Self-Employment Tax

If you fail to file your self-employment taxes, underpaid, or filed them late, you could face a payment penalty from the IRS. However, the IRS says the penalty is generally waived for taxpayers who paid at least 85% of their total tax liability. But taxpayers beware: getting involved in IRS trouble is hardly ever worth it…so it’s best to stay on top of your tax responsibilities at all times.

Remember: even if you’re unable to pay your taxes in full, it’s imperative that you file on time. The payment piece can be solved over time through a solution such as a tax payment plan. 

Get Self-Employment Tax Help

When you’re working for yourself you don’t have time to fumble with numbers or decode complicated tax regulations. With the Community Tax team on your side, you can get back to growing your business, generating new leads, and working on the stuff that really matters.

From tax preparation services to calculate your self-employment tax bill to identifying tax-slashing deductions, our team is here to provide full service, including:

• Accounting services for self-employed
• Tax monitoring services for self-employed 
• Bookkeeping services for self-employed
• Income tax services
• And more 

We’ll help you make sure you’re filing in compliance with the tax code (and saving as much as possible on your tax return). Contact us for a free tax consultation today.