To outsiders, being self-employed might look like fun. Woo-hoo! I’m my own boss. I set my own hours! But the truth is, working for yourself isn’t all fun and games. And that’s especially true during tax time when Uncle Sam hits you with the self-employment tax. Yes, the IRS has a tax just for you. Makes you feel all warm and fuzzy inside, right? Wrong!
The self-employment tax rate is 15.3% of your net earnings. It’s made up of 12.4% for Social Security and 2.9% for Medicare.1 These taxes are often called FICA, which stands for Federal Insurance Contributions Act. (You’ve probably seen FICA as a line item on a paystub at some point and wondered, Who the heck is FICA and why are they taking my money?)
How Much Is the Self-Employment Tax?
Everyone who works has to pay FICA taxes on their wages. But the difference between being self-employed and being employed by a company is that employers are required to foot the bill for half (7.65%) of FICA. So if you’re self-employed, you’re stuck paying the full 15.3%. Ouch! It’s kind of like going out to get some tacos with a friend and when it’s time to split the check, they’re like, “Oh man, I can’t find my wallet.” Pretty frustrating, right?
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And the self-employment tax is in addition to any other federal, state or local taxes you’re required to pay based on your income. So what it really boils down to is that being self-employed will cost you about 7.65% in additional taxes. But don’t freak out yet. There are some deductions that will lower your tax bill slightly. We’ll get to that in a bit.
Who Has to Pay the Self-Employment Tax?
If you earn all your income from being self-employed, you have to pay the self-employment tax. But you also have to pay it if you work a regular job and earn more than $400 a year from a side hustle, gig, freelance work—whatever you call it.2 Do you have to pay the self-employment tax on the money you earn driving for a rideshare company? Yep. Mowing yards? Yep. Selling your handmade friendship bracelets on Etsy? For sure. Any amount over $400 is subject to the self-employment tax. And in a strange piece of tax code, any amount over $108 earned while contracting for a church is taxed.3
But as your income increases, you do get some relief on the 12.4% Social Security portion of the self-employment tax. For the 2021 tax year, the maximum amount of income subject to Social Security is $142,800.4 And this limit can be reached through a combination of what you earn from your regular job, which would already have Social Security taxes taken out, and your side job.
But if your self-employed income exceeds $200,000 as a single filer or $250,000 as married filing jointly, the IRS will charge you an additional 0.9% in Medicare taxes.5
How to Calculate the Self-Employment Tax
If you’re your own boss and your boss isn’t great at math, calculating your self-employment tax can be tricky. Fair warning: Self-employed folks have to wade through more tax forms than an average tax filer. Yes, lots and lots of forms.
So to start, you’ll need to fill out Schedule C to figure out your net income from being self-employed. Schedule C is where you’ll add income listed on any 1099-NEC or 1099-K tax forms you received from doing work as a contractor. You hung onto those, right? And then you’ll deduct expenses to come up with your net income.
Next, to calculate your self-employment tax, you’ll need to fill out Schedule SE (SE stands for self-employment). Let’s look at an example to see how it all works.
Bob runs a fishing lure business, and he reported a net income of $80,000 on Schedule C. To figure out the amount of his net income that’s taxable, he’ll multiply $80,000 x 92.35%, which equals $73,880. (It’s complicated, but if you really want to know the reason why Bob only has to pay taxes on 92.35% of his income, it’s because the IRS allows self-employed people to deduct the 7.65% portion of FICA an employer would normally pay.)
So Bob’s taxable net income is $73,800. Multiply that by the 15.3% self-employment tax rate, and you get $11,304. And that’s how much he owes. That’s a pretty big chunk of change.
And remember: This is in addition to any other federal, state or local income taxes he might owe. Though when figuring out his additional taxes, he will be able to take advantage of the standard deduction or itemized deductions to reduce his taxable income. He also can deduct half of the self-employment taxes he has to pay (and that an employer normally would pay) because the IRS considers it a business expense.
When and How to Pay the Self-Employment Tax
If you hate paperwork, which means you’re human, there’s some more not-so-great news. If you’re self-employed and expect to owe more than $1,000 in taxes when you file your tax return, the IRS requires you to pay estimated taxes (also called quarterly taxes). This means you’ll have to estimate your income and the amount of taxes you expect to owe, and then make four tax payments throughout the year. Quarterly taxes are typically due April 15, June 15, September 15 and January 15. Put those dates on your calendar because you can get penalized for late payments.
To figure out your estimated taxes, you’ll need to fill out a 1040-ES form. The IRS accepts just about any kind of payment: cash, check, or online with a bank account or debit card. Unfortunately, they don’t accept Monopoly money or trades for baseball cards. (Nice try, though.)
If your side hustle doesn’t really move the needle on your income, you can lump your self-employment taxes into your regular tax return. But it doesn’t take a ton of income to accumulate more than $1,000 in taxes. So if you’re making more than about $5,000 on the side, you might have to look at filing quarterly taxes.
Another simpler option is to adjust your tax withholding at your regular job to have extra taxes taken out of your paycheck to cover the taxes from your extra income. To do this, you’ll need to fill out a new W-4 form and send it to the folks in your company’s payroll department.
Tax Deductions for Self-Employment
The Schedule C IRS form lists a bunch of expenses you can deduct from your income if you’re self-employed. Deductions lower your net income, and that means your self-employment tax will be lower. That means deductions are a good thing. Some of the most common deductions are:
- Advertising and marketing
- Office supplies
- Computer equipment and software
- Travel and business meals
- Home office
Make sure to keep receipts and invoices for all these expenses in a central location. And no, your wallet stuffed with coupons, cash and cards is not the place for them. Having detailed records will make tax time much easier and protect you if the IRS ever audits you.
Find a Quality Tax Professional
Let’s face it: Taxes are complicated. And being self-employed makes them even more complicated. If your head is swimming thinking about 1099s and Schedule Cs, a tax professional can guide you through the mountains of paperwork.
Our Endorsed Local Providers (ELPs) are RamseyTrusted and can give you the tax help you need. Find a tax professional in your area today!