4 Things to Know About Self-Employment Tax

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Tax season is well underway. And if you’re still scratching your head at filing as an independent contractor, don’t worry. Here’s a brief rundown of self-employment tax, how much it is, how to calculate it and how to pay the bill.

1. What is self-employment tax?

Similar to how most wage earners see Social Security and Medicare taxes withheld from their pay stubs, self-employment (SE) tax consists of Social Security and Medicare taxes for individuals who work for themselves.

Self-employed individuals typically are paid the full amount they earn. Because nothing is deducted from their pay, they will make tax payments during the year. If those estimated payments aren’t made throughout the year, they’ll be paid when annual returns are filed.

2. Who must pay self-employment tax?

If you entered self-employment income of $400 or more, either as cash or from a ​1099-MISC​ or 1099-K​ form, you owe self-employment tax.
To get into specifics, per the IRS, you’ll have to pay self-employment tax if any of the following

situations applied during the year:

  • You had $400 or more in net earnings from self-employment.
  • You earned $108.28 or more from church employment.
  • The tax rules apply regardless of age, even if you’re receiving Social Security or are onMedicare.These rules will apply regardless of your age, even if you’re receiving Social Security or are on Medicare.

3. What is the self-employment tax rate for 2019?

The 2019 self-employment tax rate is 15.3 percent. This includes 12.4 percent for Social Security (old-age, survivors, and disability insurance) tax and 2.9 percent for Medicare (hospital insurance). This rate applies to net earnings from self-employment tax, including combined wages, tips, bonuses, and self-employment income under any other name.

A big difference between self-employment tax and payroll tax is that employers and employees often split the bill on Social Security and Medicare. Unfortunately, for self-employed people, they pay the entire thing.

For 2019, only the first $132,900 of wages, earnings and/or tips is subject to the Social Security portion. This will increase to $137,700 when filing your 2020 taxes.

A 0.9 percent Medicare tax may apply if your self-employed net earnings exceed $200,000 as a single file or $250,000 if you file jointly.

Note that for tax purposes, your net earnings are usually your gross income minus business expenses.

4. How is self-employment tax calculated and paid?

To calculate and pay your own self-employment tax, you’ll need to figure your taxable or pass-through net income. Calculate your business taxes on Schedule C of your personal tax return. This will begin with your total earnings and then deducted ordinary and necessary business expenses.

Next, you’ll use Schedule SE (​Form 1040​ or ​1040-SR​) to calculate how much tax you owe based on that net income. Generally speaking, 92.35 percent of net earnings are subject to self-employment tax. Once you’ve determined how much of your earnings are subject to this tax, apply the 15.3 percent rate. Schedule SE will also include a deduction for one-half of the self-employment tax. Use the deduction to lower your adjusted gross income (AGI) before calculating your total.

Keep in mind that only the first $132,900 of your 2019 earnings will be subject to the Social Security portion.

Finally, take the amount of tax (minus the deduction) from Schedule SE and carry it over to your tax return. Any amount owed for Self-employment tax will be added to your personal tax liability for the current year.

Self-employment taxes can get complicated. The purpose of this article is to give you a basic understanding. Before you file, get help from a tax professional to ensure your self-employment tax is complete and accurate.


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REFERENCES:

Topic No. 554 Self-Employment Tax

Self-Employment Tax (Social Security and Medicare Taxes).

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