Self-Employment Tax: What It Is, How to Calculate It - NerdWallet (2024)

FAQs

What is self-employment tax and how is it calculated? ›

Generally, the amount subject to self-employment tax is 92.35% of your net earnings from self-employment. You calculate net earnings by subtracting ordinary and necessary trade or business expenses from the gross income you derived from your trade or business.

You can claim 50% of what you pay in self-employment tax as an income tax deduction. For example, a $1,000 self-employment tax payment reduces taxable income by $500. In the 25 percent tax bracket, that saves you $125 in income taxes.

Self-employed tax rates

Federal tax rates for 2024 are: 15% on the first $55,867 of taxable income. 20.5% on taxable income over $55,867 up to $111,733. 26% on taxable income over $111,733 up to $173,205.

HOW MUCH IS SELF EMPLOYMENT TAX? Self-employment tax is leveled at the rate of 15.3% of your net earnings. When employed this amount is split 50/50 between you and your employer, with you paying 7.65% and employers paying 7.65%. When you are self-employed you are liable for the full 15.3% tax rate on your net earnings.

The self-employment tax rate — a combination of Social Security and Medicare taxes — is 15.3% for 2023 and 2024. You'll use Schedule C to calculate net earnings and Schedule SE to calculate how much tax you owe. You can deduct 50% of your self-employment tax on your income taxes.

In order to report your Social Security and Medicare taxes, you must file Schedule SE (Form 1040 or 1040-SR ), Self-Employment TaxPDF. Use the income or loss calculated on Schedule C to calculate the amount of Social Security and Medicare taxes you should have paid during the year.

That “30% rule of thumb” comes from the fact that self-employment income is taxed at an additional 15.3% to make sure that self-employed people still pay Medicare and Social Security tax.

If you make $60,000 a year living in the region of California, USA, you will be taxed $13,653. That means that your net pay will be $46,347 per year, or $3,862 per month.

Nevertheless, independent contractors are usually responsible for paying the Self-Employment Tax and income tax. With that in mind, it's best practice to save about 25–30% of your self-employed income to pay for taxes.

Do you pay more taxes if you are self-employed? ›

In most cases, self-employed contractors will pay a slightly higher tax rate than employees on paper – but overall they typically pay a lower amount of taxes due to business tax breaks and expense deductions.

In addition to federal, state, and local income taxes, simply being self-employed subjects one to a separate 15.3% tax covering Social Security and Medicare. While W-2 employees “split” this rate with their employers, the IRS views an entrepreneur as both the employee and the employer. Thus, the higher tax rate.

By separating the income earned by the corporation into two separate methods of payment to you as the individual, you avoid self-employment tax on funds paid as a distribution. Note that you have to elect to be taxed as an S corporation for this to apply.

Examples of independent contractors include doctors, journalists, freelance workers, lawyers, actors, and accountants who are in business for themselves. It is worth noting that independent contractors are not just limited to specialized fields and can include various jobs.

Self-employment tax vs.

Income tax is simply a tax applied to the money you earn from your job. Everyone must pay income taxes regardless of who they work for. Self-employment tax is meant to pay for the costs usually covered by payroll taxes.

Qualified business income deduction: Do you qualify? The QBI deduction is for you if you're a small-business owner, or self-employed, allowing you to deduct up to 20% of your QBI from your taxes. This includes people who have “pass-through” income, which is business income that you report on a personal tax return.

You'll always get taxed on your self-employment income, even if it's less than the standard deduction.