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What is Self Employment Tax? (2020-21 Rates)

What is self-employment tax?

Self-employment tax is the Social Security and Medicare tax paid by self-employed individuals. It’s similar to the FICA tax that employers withhold from their employees’ paychecks. Except no one will deduct it from your pay—business owners are responsible for paying their own self-employment taxes.

Do I have to pay self-employment tax?

Every self-employed person has to pay self-employment taxes on their self-employment earnings of $400 or more. The IRS considers you to be self-employed if you are a freelancer, independent contractor, or own a small business.

How much is self-employment tax?

The self-employment tax rate is 15.3%, with 12.4% for Social Security and 2.9% for Medicare. However, the Social Security portion may only apply to a part of your income. That’s because of the Social Security wage base.

For 2021, the Social Security wage base is $142,800. This means that in 2021, Social Security tax only applies to the first $142,800 of your combined income from wages and self-employment. After that, you aren’t charged any additional Social Security tax. There is no limit on the Medicare portion of self-employment tax. So no matter how much you earn, the Medicare tax applies to all of your wages and self-employment income.

For example, say you have a full-time job earning $150,000 for the tax year. You also have a side hustle making custom party cakes that brings in an additional $20,000 per year. In 2021, your employer withholds Social Security taxes on $142,800 of your wages. Since you’ve already reached the Social Security wage base, you wouldn’t have to pay the 12.4% Social Security portion of self-employment taxes on your side hustle income. You’d only have to pay the 2.9% Medicare portion of self-employment tax.

Calculate your estimated quarterly taxes (for free)

Follow our step-by-step estimated quarterly tax calculator to figure out how much you owe.

What’s your business structure?

Additional Medicare tax

High-earning tax filers are also responsible for paying an additional Medicare tax of 0.9% on income above the following thresholds, depending on their filing status:

  • Married filing jointly: $250,000

  • Married filing separately: $125,000

  • All other filing statuses: $200,000

How to calculate self-employment tax

To calculate your self-employment tax, the first step is knowing your net earnings from self-employment. To calculate your net earnings, subtract your business expenses from business revenues.

If the result is less than the Social Security wage base, the calculation is simple. If your net earnings are more than the Social Security wage base, your calculation will have a few additional steps. We’ll show you how to calculate your tax either way.

If your net earnings are below the Social Security wage base:

1. Figure out your net earnings subject to self-employment tax.

Let’s say you had net income from self-employment of $100,000 for 2021. To find the taxable amount, multiply $100,000 by 92.35%. Why 92.35%? Because the 7.65% deduction takes into account the employer-half of your FICA taxes, which the business would deduct if you were paid as an employee.

$100,000 x .9235 = $92,350

2. Calculate your self-employment taxes.

Next, multiply your self-employment taxable income by the 15.3% self employment tax rate.

$92,350 x .153 = $14,130

Your self-employment taxes are $14,130. We’ve rounded the result because the IRS gives you the option of rounding off cents to whole dollars on your tax return and schedules.

If your net earnings are above the Social Security wage base:

1. Figure out your net earnings subject to self-employment tax.

Let’s say your net earnings from self-employment were $150,000 for 2021. Only $142,800 of your earnings are subject to Social Security taxes, so we have to add an extra step in the calculation.

Social Security Medicare
‘Adjusted’ earnings $142,800 $150,000
Less: self-employment adjustment ( x 92.35%) 0 (11,475)
Taxable self-employment income $142,800 $138,525

2. Calculate your self-employment taxes.

Next, multiply your taxable self-employment earnings by the individual rates for Social Security (12.4%) and Medicare (2.9%).

Social Security Medicare
Taxable self-employment income $142,800 $138,525
x Tax Rate (12.4% SS, 2.9% Medicare) $17,707 $4,017

Total self-employment tax: $17,707 + $4,017 = $21,724

When to pay self-employment tax

If you had self-employment income earnings of $400 or more during the year, you are required to pay self-employment taxes and file Schedule SE with your Form 1040, which is generally due by April 15. However, if you expect to owe $1,000 or more in combined income tax and self-employment taxes, you’ll need to make estimated quarterly tax payments.

Estimated payments are due on April 15, June 15, September 15, and January 15 of the following year. Those dates shift to the next business day if the 15 falls on a weekend or holiday.

You can estimate the amount you need to pay using the worksheet on page 8 of Form 1040-ES. The form will help you determine the amount you’ll owe for the year, divide it by four, and pay in equal installments by the due dates mentioned above. The form also includes vouchers to include when mailing your payment. If you prefer to pay online using IRS Direct Pay, you won’t need a voucher (or a stamp).

You can also use our free estimated tax calculator to figure out how much estimated tax you’ll owe.

Calculate your estimated quarterly taxes (for free)

Follow our step-by-step estimated quarterly tax calculator to figure out how much you owe.

What’s your business structure?

How to avoid or reduce self-employment tax

Many new business owners cringe at the idea of paying an additional 15.3% of their hard-earned cash into self-employment taxes. The good news is, there are ways to reduce the amount you owe.

  • Track all business expenses. Since self-employment taxes applied to net earnings rather than your gross income, deductible business expenses will reduce the amount you owe. Be sure to track and take advantage of all tax deductions.

  • Take an above-the-line deduction. The tax code allows self-employed people to deduct half of their total self-employment tax as an above-the-line deduction. This deduction mirrors the employer portion of Social Security and Medicare that would be paid by your boss if you worked for someone else. Take your calculated self-employment tax and divide it in half. The result goes on line 14 of Schedule 1 attached to your Form 1040.

  • Make an S-corp election. Some LLC members can reduce their self-employment tax burden by electing to have their LLC taxed like an S corporation. This is because S corp owners pay Social Security and Medicare taxes only on their salary, which LLC members pay self-employment taxes on 100% of their share of the LLC’s profits. However, making an S corp election isn’t right for everyone. Talk to a tax professional to determine whether it’s the right move for you.

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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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