The Self-Employment Tax

Traditional W-2 workers have their Social Security, Medicare, and income taxes withheld from their paychecks throughout the year. When it’s time to file, most, if not all of their tax has already been paid, and they’ll often get a nice refund Bookkeeper360 App Xero Integration Reviews & Features Xero App Store US from the IRS. Self-employment tax (or SE tax) is the Social Security and Medicare tax (health insurance) paid by self-employed individuals. It’s similar to the FICA tax that employers withhold from their employees’ paychecks as payroll taxes.

Employers withhold taxes from full-time employees’ paychecks and pay it to the government on their behalf. For self-employed individuals, however, it’s a bit more complicated. The self-employment tax is a federal tax paid by freelancers, independent contractors, small business owners, and others on their net earnings. It’s used to collect Social Security and Medicare taxes from self-employed individuals. The self-employment tax equals the total amount due for those two taxes.

How is Self-Employment Tax Calculated? Try our FREE calculator

When you work for someone else, you get a W-2 form from your employer at the end of the year telling you exactly how much money you made. When you’re self-employed, you have to figure that out yourself. That means you must keep accurate records of how much money you earn for the work you do and how much you spend to operate your business. You calculate your self-employment tax on Schedule SE and report that amount in the «Other Taxes» section of Form 1040. In this way, the IRS differentiates the SE tax from the income tax.

To calculate how much you’re likely to pay in self-employment taxes this year, you can first determine what the taxable 92.35% of your earnings amounts to. Once you determine what 92.35% of your net earnings amounts to, you can use the current self-employment tax rate to determine how much you may owe in total. Social Security tax is assessed at a rate of 6.2% for an employer and 6.2% for the employee. Therefore, a self-employed worker is taxed 12.4% (6.2% + 6.2%) as they are considered to be both an employer and an employee.

Self-employed people pay more in FICA taxes

When you’re an employee, you share that cost with your employer, with each of you paying a share of the FICA tax. Your share is automatically taken out of your paycheck so it doesn’t typically show up on your tax return. When you’re self-employed, though, you’re stuck with the full amount yourself. Self-employment taxes are similar to FICA taxes, which W-2 workers split with their employers. You’ll be responsible for the entire amount, but you can deduct half the tax on Schedule 1, Line 15 of your federal tax return.

However, you figure self-employment tax (SE tax) yourself using Schedule SE (Form 1040 or 1040-SR). Also, you can deduct the employer-equivalent portion of your SE tax in figuring your adjusted gross income. Wage earners cannot deduct Social Security and Medicare taxes. Some of these tax write-offs may seem small, but they can add up quickly, making them worthwhile to track. After all, each time you write off an expense, you lower your self employed taxable income. That means less tax paid, helping replace the money you spent on your business and putting it back in your pocket.

✘ Don’t download your bank’s mobile app

If it is considered a corporation, you can elect to have it treated as a disregarded entity unless it is a “per se” corporation. Specific types of business entities from specific countries that are per se corporations are listed in the instructions https://adprun.net/whats-the-difference-between-bookkeeping-and/ for form 8833. There is no election that can be made to have per se corporations treated as anything other than corporations. The good news is that you can pursue your dream career while still maintaining a reasonable tax bill.