How do I Calculate My Self-Employment Tax?

Being self-employed is a dream for many. Being your own boss and setting your own hours are serious perks. But, they come at the cost of responsibilities, including taxes that can be complicated.
As a self-employed individual, you are required to pay the regular income tax as well as the self-employment tax.

What is the self-employment tax?

It is made up of Medicare and Social Security taxes. It takes the place of the Medicare and Social Security taxes that are directly withheld from the paychecks of regular wage earners.

Employers directly calculate the Social Security and Medicare taxes of their employees. However, as a self-employed individual, you calculate the self-employment tax yourself using Schedule SE, i.e., Form 1040 or 1040-SR.

What's the difference between self-employment tax and income tax?

Self-employment tax is different from income tax (including federal and state income tax), though as someone who is self-employed, you are responsible for paying both.

Income tax is paid by anyone who earns money, regardless of how they are employed. In contrast, self-employment taxes are only paid by individuals whose employers do not pay their share of Social Security and Medicare taxes.

Self-employment Tax Rate

The Self-employment tax rate stands at 15.3%. It is a sum of 12.4% Social Security, which funds the Survivors, Old-age, and Disability Insurance Program (also known as Social Security), and 2.9% Medicare tax, which funds health insurance for people 65 and older and other people.

It is applied to net earnings, commonly known as profit.

The significant difference between the self-employment tax paid by the self-employed and payroll taxes paid by regular wage earners is that employees and their employers typically split the Social Security and Medicare bill, i.e., the employer pays 7.65%, and the wage earner pays 7.65%. In contrast, self-employed individuals pay both halves of the total 15.3%.

  • For the 2022 tax year, the first $147,000 of one's earnings is subject to the Social Security tax
  • An additional 0.9% Medicare tax will also apply if your net earnings from self-employment exceed $200,000 as a single filer, or $250,000 if you're married and filing jointly

How to calculate the Self-Employment Tax  

It begins by calculating the net earnings from self-employment for the tax year.

  • For tax purposes, gross income minus business expenses = net earnings
  • Typically, 92.35% of your net earnings from self-employment are subject to self-employment tax
  • Once you've calculated your net earnings from self-employment that are subject to the social security tax, apply the 15.3% tax rate to it
  • If you incurred a loss or made only a little income from self-employment, check out the two optional methods given in IRS Schedule SE to calculate your net earnings

Self-employment tax deduction

The IRS requires anyone earning $400 or more in self-employment income to file a tax return that includes a Schedule SE, which is used to calculate the amount of SE tax, or self-employment tax, that you owe.

Because self-employment tax is not the same as income tax, you're eligible to deduct between 50% and approximately 57% of your self-employment tax payment from your income tax. The precise amount would depend on your self-employment income.

Who has to pay self-employment tax?

Generally, you need to pay it if either of these things is valid during the tax year:

  • You earned $400 or more in net earnings from self-employment (excluding anything you made as a church employee).
  • You receive a 1099 form from an entity that you worked for, in which case, the IRS considers you to be self-employed
  • You earned $108.28 or more in income from church employment

Age is not a bar for the application of these tax rules; even if you are on Medicare or are receiving Social Security.

How to pay Self-Employment tax

  • Generally, the net earnings from self-employment are calculated on IRS Schedule C
  • IRS Schedule SE is used to calculate the self-employment tax you owe
  • Your individual taxpayer identification number (ITIN), or your Social Security number is needed in order to pay the tax
  • Waiting until the annual tax-filing deadline in order to pay your self-employment tax may mean incurring penalties for late payment. The safer choice is to make quarterly estimated tax payments throughout the year if you expect the following:
  • You'll need to make estimated quarterly tax payments if you expect to owe $1,000 or more in federal income taxes this tax year, even after accounting for your refundable credits (such as the earned income tax credit) and withholdings.

If you reach the end of the tax year, and your estimated tax payments throughout the year aren't enough to cover your taxes, you might have to pay a fine. There are two situations where you can avoid the fine:

  1. If you end up owing less than $1,000 in tax after subtracting your withholding and refundable credits.
  2. If what you paid in quarterly taxes is at least 90% of what you owe at the end of the tax year or 100% of the tax that your return from last year shows – whichever of these is smaller.

How to reduce the self-employment tax

There are two ways you can make your SE tax lower.

Form an S-Corp

Self-employment tax applies to income from self-employment, but if you form an S-Corp, your clients will pay your S-Corp for products or services instead of paying you directly. You would pay a percentage of the S-Corp's earnings to yourself as a salary, and the rest of the S-Corp's earnings would be profit, also known as dividends. So, the salary portion would fall under earned income for you and be subject to SE tax.
The dividends wouldn't be subject to the same, helping you to reduce the net income that you would need to pay this tax on.

Reduce net profit by writing off business expenses

Net profit = gross income minus business expenses. This means that the lower your net profit is, the lower your self-employment tax bill will be.

Common business tax deductions include:

  • Home-office deduction
  • Business meals
  • Health insurance
  • Continuing education costs
  • Office supplies
  • Business travel
  • Phone and internet bill
  • Startup costs
  • Advertising costs
  • The qualified business income deduction

Thus, figuring what you owe in SE  tax can be tedious, but you can greatly simplify the process using A.I. tools like FlyFin's 1099 tax calculator. The FlyFin app guarantees maximum tax savings and the lowest self-employment tax bill. It's 100% accurate A.I. technology finds every possible tax deduction automatically, eliminating 98% of your work, as well as filing your taxes for you at a fraction of the cost.

FlyFin CPA Team

FlyFin CPA Team

With a combined 150 years of experience, FlyFin's CPA tax team includes tax CPAs, IRS Enrolled Agents and other tax professionals, offering users the most comprehensive tax advice and preparation.

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