In your business tax planning, don't forget self-employment tax for Social Security and Medicare paid by business owners. It's the same tax (and the same rate) as taxes paid by employees and employers, but it's paid in a different way. Learn how this tax is calculated and how it works with your personal tax return.
Self-Employment Tax Defined and Explained
Self-employment tax is a tax paid by individuals who are self-employed (work for themselves), for Social Security and Medicare taxes. It’s similar to the portion of Social Security and Medicare taxes (called FICA taxes) paid by individuals on income from their work as employees.
Everyone who has earned income from work in the U.S. must pay Social Security and Medicare tax in order to receive benefits from these programs. The total amount of the tax is the same for everyone, including both employees and self-employed people, but the earnings for the calculation are different:
- Employee FICA tax is based on the person’s wages for the year.
- Self-employment tax is based on the net income (profit) of the person’s business. If the business has no profit, no self-employment tax is due.
Employers and employees share the cost of these taxes. A self-employed person receives credit for the entire amount, but they can take a tax deduction for half of the amount, on their tax return.
|Percentage of Income Paid|
|Total||15.3%||7.65||7.65%||15.3%, minus deduction for half|
Social Security Maximum and Additional Medicare Tax
The amount you pay for self-employment tax is affected by two special circumstances. The Social Security portion is capped each year at a different amount, with an earnings maximum set by the IRS. For example, the maximum amount of Social Security earnings for 2021 is $142,800. When earnings reach this amount, no additional Social Security tax is payable.
There is also an additional 0.9% Medicare tax for higher-earning individuals. It kicks in when the individual reaches $200,000 in earnings in either wages or self-employment income.
How Self-Employment Tax Works
Here’s an overview of the process for calculating, reporting, and paying self-employment tax.
Step 1: Calculate Your Business Net Income
When you prepare your tax return for the year, you must include a calculation of your self-employment net income (profit) for the year. For example, if you file Schedule C as a sole proprietor or single-member LLC owner, the amount on Line 31 “Net Profit or (Loss)” is the amount used to calculate self-employment tax.
Other types of self-employed individuals use different forms to calculate their income from their business. This includes partners in partnerships and owners of multiple-member LLCs. It does not, however, include S corporation owners, who are not considered self-employed.
Step 2: Calculate the Amount You Owe
You’ll need to use IRS Schedule SE to calculate the amount of the tax. This is an oversimplified calculation to show you how it works:
Carlos is a single taxpayer. He has no income other than his business income, so he can use the short form of Schedule SE. He has calculated his business net income on Schedule C as $43,400. (He isn't over the Social Security maximum for the year, and his income isn't over the threshold for the additional Medicare tax.)
- He must first multiply this amount by 92.35% (which the IRS considers the general amount subject to self-employment tax) = $40,079.90.
- Then he multiplies this amount by 15.3% (the self-employment tax rate).
- $40,513.90 X 15.3% = $6,132.22
- This is the amount of his self-employment tax. But, he's not done yet.
- He then figures the deduction at 50% of this amount.
- $6,198.62 X 50% = $3,066.11
- The other half ($3,066.11) is the amount of self-employment tax he must carry over to his tax return and pay income tax on.
The self-employment tax calculation is complicated. It’s best to use business tax preparation software or a tax professional to make sure you have the correct amount.
Step 3: Paying Self-Employment Taxes
The IRS requires all taxpayers to pay the taxes on their income as they receive it, including both income tax and self-employment tax. Employees have their FICA taxes withheld from their pay, but self-employed individuals don’t receive a paycheck. You may need to make estimated tax payments each quarter during the year that include both income taxes and self-employment taxes.
Failure to pay based on each quarter’s income for self-employment taxes and income taxes can result in penalties for underpayment.
Due dates for estimated taxes are based on when the income was received:
- April 15 for income received for the period January 1 through March 31
- June 15 for income received for the period April 1 through May 31
- Sept. 15 for income received for the period June 1 through Aug. 31
- Jan. 15 of the next year for income received for the period Sept. 1 through Dec. 31
- You pay self-employment tax each year based on your income from your business as a self-employed person.
- The tax should be included in your estimated tax payments for the year and paid on your personal tax return.
- The good news is you don't have to pay this tax if you don't have a profit in your business for the year.
- The bad news is you don't get Social Security/Medicare credit for benefits for the year if you don't have a profit and you don’t pay the tax.
Frequently Asked Questions
What if I have both employment income and self-employment income?
If you have both types of income, the two are considered together for several purposes. To calculate self-employment tax if you are over the Social Security maximum, employment income comes first, then self-employment income, up to the Social Security maximum amount for the year.
For example, if you have $30,000 in wages and $45,000 in self-employment income for the year, you pay both FICA taxes and self-employment tax on the full amounts. But if you have $100,000 in employment income and $45,000 on self-employment income in 2021, you pay FICA tax on the full $100,000 and only on $42,800 for self-employment tax.
How do I make estimated tax payments?
To pay your estimated taxes, you can use:
- The IRS Direct Pay website
- The Electronic Federal Tax Payment System
- IRS payment vouchers if you mail your payment for each quarter (see IRS Form 1040-ES)
Is there an easy way to figure my estimated tax payments?
You can get help calculating your estimated tax payment amounts for the year in several ways:
- Tax preparation software
- The estimated tax worksheet on IRS Form 1040-ES Estimated Tax for Individuals
- One of several worksheets on IRS publication 505