Many people today work both as an employee for someone else and also as a self-employed contractor or freelancer. One common circumstance is to work that second job in the sharing economy, ride-sharing with a company like Uber or renting a home through Airbnb. But having these two streams of income means two forms of payroll taxes.
Paying Both Self-Employment Taxes and FICA Taxes
If you are self-employed and you also earn wages or salary from employment, your Social Security and Medicare eligibility and total self-employment tax is affected. You are self-employed if you are making money in your own business, as an independent contractor, freelancer, sole proprietor, partner in a partnership, or member of an LLC or an S corporation. If you own a corporation, you are not self-employed.
FICA Taxes vs. Self-Employment Taxes
It's confusing to talk about FICA tax and self-employment tax as if they were different, but the terms are actually talking about the same thing: Social Security and Medicare tax on earned income. FICA tax is Social Security/Medicare tax on employment; Self-employment tax (sometimes called SECA) is Social Security/Medicare tax on self-employment.
Also note that your employer pays half of the FICA tax due, while you as a self-employed individual must pay the entire amount of Social Security/Medicare on your self-employment income.
A self-employed individual can be someone who runs a business as a sole proprietor, LLC owner, or partner in a partnership. You may not have a formal business structure, but you report your business taxes on Schedule C with your personal tax return.
The IRS says you are self-employed if:
- You carry on a trade or business as a sole proprietor or an independent contractor.
- You are a member of a partnership that carries on a trade or business.
- You are otherwise in business for yourself (including a part-time business)
That is, if you are in business to make money, you are considered self-employed.
How These Taxes Are Paid
- Your employer MUST withhold FICA taxes (Social Security and Medicare) from your employment income.
- You must pay self-employment tax on the net profit of your employment if you still owe these taxes after considering your total income for the year.
You must pay these taxes on your total income. But you can't over-pay unless your employer has made a calculation error. Here's a more detailed explanation of how the process of determining and paying Social Security/Medicare tax works:
Employment and FICA Tax
Your employment income and FICA tax paid is determined first. Your employer withholds Social Security and Medicare tax from your paychecks as an employee. The Social Security tax is capped at a maximum each year at a specific income level. When your income for the year exceeds that level, you stop paying the Social Security tax. The Medicare tax is not capped.
If you are self-employed, you pay self-employment tax (SECA) based on your net income (profit) from your business. You pay this tax the rate of 12.6% of that income. You don't have to pay this tax as you go since you don't have to withhold it from your business income. You don't get a paycheck from your business since you are not an employee. This tax is not calculated until your net business income is determined at tax time. The form used to calculate self-employment tax is Schedule SE.
Calculating Self-Employment Tax
To show you how employment and self-employed are considered for Social Security and Medicare taxes, here is the (vastly over-simplified) process for calculating self-employment tax on Schedule SE:
- First, the net income from your business for that year is entered.
- Second, the amount of self-employment tax owed is calculated.
- Third, any income from employment and the amount of FICA tax is considered.
Finally, the amount already paid from your employment is deducted from the total Social Security/Medicare tax owed. If there is anything left, it is due to self-employment tax, on your personal tax return.
An Example of Self-Employment Tax Calculation
Let's say you earned $50,000 from employment and $30,000 net income from self-employment in 2016. The total of $80,000 from your wages and your self-employment is less than the Social Security maximum of $117,000, so your Social Security tax is due on all of your income.
Let's say $3,100 in FICA taxes has been withheld from your wages. You also owe about $3720 as self-employment tax on your $30,000 of self-employment income. (The calculation gets a little tricky here; this may not be exact, depending on your specific situation.)
The $3720 you owe as self-employment tax is included on Line 27 of your personal Form 1040, and is included with any income tax you owe to determine your total tax bill for the year.
If your income from employment and self-employment is greater than the Social Security maximum, you still must continue to pay Medicare tax. There's no cap on Medicare tax, and you may also be required to pay an additional Medicare tax of 2.9% if your income exceeds a specific amount.
Paying Your Self-Employment Tax
Because self-employment tax is not withheld, you could potentially have a large tax bill at tax payment time. Many business owners make quarterly estimated payments, including estimated amounts for self-employment tax along with estimated income tax.
You could also increase your federal and state income tax withholding from your employment to cover this additional cost. For more information and examples, see this article on Self-Employment and Social Security Tax, from the Social Security Administration.