Taxes that self-employed people and small business owners pay to the federal government to support Medicare and Social Security are referred to as self-employment taxes. The self-employment tax is comparable to the FICA tax, which is paid by employers under the Federal Insurance Contributions Act. An individual must pay this tax if their net self-employment income for the entire tax year is $400 or more, or if they receive $108.28 or more from a religious organization that is exempt from paying it. Self-employment tax is computed and reported through Schedule SE, which is a part of the IRS Form 1040.
Taxes are not due by self-employed individuals who make less than certain sums.
The Self-Employment Tax Rate For 2022-2023
As previously mentioned, self-employment tax comprised of a 2.9% Medicare tax and a 12.4% Social Security tax on net income, totaling a 15.3% rate. It's essential to note that this tax is separate from income tax.
The Social Security part applies to the first $147,000 of earnings for the 2022 tax year. It increases to $160,200 in 2023.
If your net self-employment income exceeds $250,000 for joint filers or $200,000 for single filers, an additional 0.9% Medicare tax may be due.
How To Calculate Self-Employment Tax
When calculating your taxes, the initial step is to determine your net self-employment income for the year.
Net earnings are typically your self-employment gross income less your business expenses for tax purposes.
Self-employment tax generally applies to 92.35% of your net self-employment income.
Apply the 15.3% tax rate after calculating the portion of your net self-employment income that is taxable.
Recall, though, that in 2022, the Social Security portion of self-employment tax is only applicable to the first $147,000 ($160,200 in 2023) of earnings.
Be sure to look at the two alternate techniques in IRS Form SE to determine your net profits if you incurred a loss or only a little amount of revenue from self-employment.
How To Pay Self-Employment Tax?
You often utilize IRS Schedule C to determine your net self-employment income.
If you need to calculate your self-employment tax, you can use the IRS Schedule SE.
Your Social Security number or individual taxpayer identification number must be provided when paying the tax (ITIN).
In the United States, taxes are paid on a pay-as-you-go basis. Delaying payment of your self-employment tax until the annual tax-filing deadline may result in late-payment penalties. To avoid this, you may need to make quarterly estimated tax payments throughout the year if you expect:
Even after factoring in your withholding and refundable credits, you'll still owe at least $1,000 in federal income taxes this year (such as the earned income tax credit)
Less than 90% of your tax liability for this year or 100% of your liability for previous year, whichever is smaller, will be covered by your withholding and refundable credits. (If your adjusted gross income was more than $150,000 for married couples filing jointly or $75,000 for individuals, the threshold is 110% of tax owed the previous year.)
- Self-employment tax is imposed on independent contractors and small business owners who do not otherwise pay withholding taxes.
- Self-employment tax is recorded on IRS Form 1040 Schedule SE and is used to pay for Social Security and Medicare.
- Self-employed workers include sole proprietors, independent contractors, and freelancers who run a business or practice a craft.
- The self-employment tax is not due by people who are self-employed and make less than $400 annually (or less than $108.28 from a church).
- The employer's share of 2020 Social Security taxes will now be paid in 2021 and 2022 thanks to the CARES Act.