How to Calculate and Pay Self-Employment Taxes
Self-employment taxes are paid to the Social Security Administration for Social Security and Medicare eligibility. If this tax sounds familiar, it's because it's essentially the same as Social Security and Medicare taxes for employees, just with a different name.
You pay these taxes on your personal tax return, along with the income tax liability for your business. Self-employment taxes are not withheld from your income as a business owner. You must figure the amount of the tax and keep track during the year.
You may also need to pay estimated taxes to cover the amount of business income tax and self-employment tax you'll need to pay with your tax return.
What Does It Mean to Be Self-Employed?
According to the Internal Revenue Service (IRS), you're self-employed if either of the following applies to you:
- You carry on a trade or business as a sole proprietor.
- You are a member of a partnership or limited liability company (LLC) that files a Form 1065, U.S. Return of Partnership Income, that carries on a trade or business.
You're self-employed if you are in business for yourself, including a part-time business. You're also considered self-employed if:
- You're an independent contractor or freelancer working for someone, but not as an employee.
- You receive a 1099-NEC tax report from someone you do work for.
You are NOT self-employed:
- If you're an owner (shareholder) of a corporation.
- You receive only a W-2 (the annual tax report for employees).
You can be self-employed in one job and be an employee in another job.
What Are Self-Employment Taxes?
Self-employment taxes are taxes that every self-employed person must pay for Social Security and Medicare. This tax is similar to FICA taxes, the Social Security and Medicare taxes that employees pay through payroll withholding.
The self-employment tax rate is 15.3% of your net profit or loss from your business for a year.
You must figure your business taxes for the year, including income, expenses, tax credits, and other adjustments. The result is your net earnings (the same thing as profit or loss).
This tax rate is related to the FICA tax rate: for FICA taxes, employees and their employers share the tax. You pay both the employer's and employee's share when you're self-employed.
How Does My Business Type Affect My Self-Employment Income?
If you are a sole proprietor, a member (owner) of an LLC, or a partner in a partnership, you're considered to be self-employed, and your portion of net income from your business is subject to self-employment tax.
The calculation of net income for your business is done in basically the same way for each of these business types.
You'll receive a share of the net income of the business based on the rules of your partnership if you're a partner in a partnership or a member of an LLC. Your self-employment tax would be based on this income, even if the income stays in the business.
Reporting Self-Employment Income and Taxes
Self-employed individuals report their business income on their personal tax return.
- All self-employed individuals calculate and report self-employment tax on Schedule SE.
- Sole proprietors and single-member LLC owners report business net income on Schedule C.
- Partnerships and multiple-member LLCs report business net income on Schedule K-1.
You must pay self-employment tax on the net income of your business, not the money you may take out of the business to pay yourself, if you're self-employed.
How Much Is the Self-Employment Tax Rate?
There are three pieces to the self-employment tax rate:
Base rate: The self-employment tax rate is 15.3% of net income from self-employment, but the Social Security portion of this tax is capped at the Social Security maximum income each year. You must pay self-employment tax and file Schedule SE if your net earnings from self-employment are $400 or more during the year.
Adjustment: The amount subject to self-employment tax is 92.35% of your net self-employed earnings. All of your earnings are subject to the Medicare tax, including the additional Medicare tax for higher-earning individuals.
Employer-equivalent credit: Half the amount of the calculated self-employment tax is credited back to the business owner before figuring your adjusted gross income amount on the owner's tax return. The IRS calls this the "employer-equivalent" portion of your self-employment tax. This deduction doesn't affect your net earnings from self-employment or your self-employment tax.
How Do I Calculate Net Earnings for Self-Employment Taxes?
- Tax credits
- Depreciation allowances
This general calculation differs slightly, depending on the business type.
If you have more than one business, combine the net earnings or losses for these businesses. A loss from one business can reduce your total net income from both businesses. File one Schedule SE for the combined earnings of both businesses.
How Do Self-Employment Taxes Affect My Personal 1040 Tax Bill?
Your self-employment taxes are added to your income taxes on your personal income tax return.
First, calculate the amount of your self-employment taxes, based on your business net income. Then, add these taxes to the total taxes owed. Your total tax bill includes both self-employment taxes and income taxes owed.
What If I Am Self-Employed and Also an Employee?
If you are self-employed and also an employee of someone else, both incomes are included to determine the total amount of Social Security and Medicare tax you must pay.
Employment income is considered first, but you may owe additional Social Security and Medicare tax depending, on the net earnings of your self-employed work.
How Do I Pay Estimated Self-Employment Taxes?
Self-employment taxes, like income taxes, aren't withheld from your income as a business owner. So, you must pay these taxes at tax time, through your personal tax return.
However, the IRS doesn't want to wait until tax time to collect your self-employment tax. You may need to pay self-employment taxes and taxes on your business income quarterly, to avoid penalties.
These are known as "estimated taxes." You are expected to calculate and pay these taxes quarterly: by April 15, June 15, September 15, and January 15 of the following year.
If your business is in Texas or another area where FEMA issued a disaster declaration due to winter storms in 2021, the IRS has extended the filing and payment deadlines for estimated taxes April 15, 2021 to June 15, 2021.
As a self-employed business owner, it is important to understand your payment obligations in accordance with U.S. tax laws. Make sure that you accurately report your income and your self-employment taxes so there are no surprises.