The self-employment tax rate is 15.3%. There are also several other taxes you may have to pay.
What is the self-employment tax?
The 15.3% self-employment tax consists of two taxes. Social Security tax is 12.4%, and Medicare tax is 2.9%.
When you add in federal income tax, your total tax rate on self-employment income can range from 25.3% to 47.3%.
Social Security
The Social Security tax applies to your first $160,200 in earned income (as of 2023). After that, you won’t pay any additional tax.
If you have multiple jobs, the limit applies to your combined income. It’s not per job.
If you earn more than $160,200 from a single employer, that employer will stop withholding Social Security. If you end up having too much Social Security withheld, you’ll get it back as a tax refund when you file your tax return.
When you’re self-employed, your W-2 jobs pay your Social Security first.
So if you have over $160,200 from a day job, you don’t have to set aside anything extra for Social Security for a 1099 side gig. If you make $100,000 from a W-2 job and $70,000 from a side gig, you only need to pay Social Security on $60,200 of your side gig income.
Medicare
The 2.9% Medicare tax applies to all of your earned income. Unlike Social Security, there’s no cap on the income you pay Medicare taxes on.
If you make more than $200,000 as a single filer, $250,000 as a joint filer, or $125,000 as a separate filer, you’ll have to pay the Additional Medicare Tax. The Additional Medicare Tax is 0.9% and can also apply to investment income and other unearned income.
Self-Employment Taxes vs. FICA Taxes
Self-employment taxes go to the same things as FICA taxes. The difference is that self-employment taxes are double than your FICA withholdings.
That’s because the employer pays half of Social Security and Medicare taxes and the employee pays the other half. When you’re self-employed, you have to pay the employer portion as well as the employee portion.
Self-Employment Taxes vs. Income Tax
Both self-employment tax and income tax are based on your earnings, but they serve different purposes and have different rates and rules.
Self-employment taxes go to specific programs — Social Security and Medicare. Income tax, on the other hand, is a general tax that goes toward’s the government’s general budget.
Income tax also applies to other types of income such as wages, salaries, bank interest, and investment income.
Are there state self-employment taxes?
Most states don’t have a separate self-employment tax. You’ll usually only have to pay state income taxes.
If you create a corporation, LLC, or other business entity, you may owe business taxes or fees for that business.
What counts as self-employed?
Self-employed includes most types of non-W2 jobs, including:
- Entrepreneurs
- Bricks and mortar small businesses.
- Independent contractors who receive a 1099-NEC.
- Sole proprietors.
- Partners in a partnership.
- People who engage in a skilled trade on their own rather than as an employee.
- Gig economy jobs
If your earnings are from an activity you do for fun, you may be able to classify the activity as a hobby for tax purposes and avoid self-employment taxes.
How do you pay self-employment taxes?
Self-employment taxes are part of your Form 1040 individual tax return due in April each year. Most self-employed individuals report their income and expenses on Schedule C.
Your tax software should then automatically generate a Schedule SE. Schedule SE calculates your self-employment taxes.
If you expect to owe more than $1,000 combined in self-employment taxes and income taxes, you will likely need to make estimated tax payments.
Estimated tax payments are quarterly payments of the taxes you expect to owe for the year. If you wait to pay until you file your tax return, you may have to pay the estimated tax penalty and interest.
What happens if I don’t pay self-employment tax?
If you don’t pay your self-employment tax, you may face penalties and interest on the unpaid tax amount. The IRS may also take collection actions, such as placing a tax lien on your property or garnishing your wages.
Additionally, failure to pay self-employment tax can affect your eligibility for Social Security and Medicare benefits in the future. Remember, Social Security retirement benefits are based on your average net earnings each year, so if you report low income, you’ll receive lower benefits.
Are there deductions on self-employment tax?
There are no specific deductions for self-employment tax, but your business deductions will reduce it. That’s because self-employment tax is based on your business net profit after deductions.
Tax deductions that don’t reduce self-employment tax include:
- Personal itemized deductions
- Contributions to your self-employed retirement accounts
- Self-employed health insurance deduction
- HSA deduction
- Qualified Business Income Deduction
- Other personal deductions that reduce your income taxes
Is self-employment tax deductible?
One half of your self-employment tax is deductible. That covers the employer portion.
Don’t add self-employment tax to your Schedule C or itemized deductions.
You calculate your self-employment tax deduction using Schedule SE. You then enter the deduction amount on Schedule 1.
If you file using tax software, the software will automatically do everything for you.
What other taxes will I owe?
You may also owe the following taxes.
State and Federal Income Taxes
You will owe personal income taxes on either your profit share or your wages plus distributions.
- For sole proprietorships, partnerships, and S-corporations, you pay your personal income tax rate on your share of the total net profits. You may be eligible for the Qualified Business Income deduction to reduce your income taxes.
- For C-corporations, your tax is your personal income tax rate on your wages plus your dividends tax rate on your profit distributions.
- LLCs depend on whether you’ve elected to be taxed as a pass-through (see first bullet point) or corporation.
Business Income Tax
If you have a business entity other than a sole proprietorship, your state may tax your business profits. Taxes may apply even if you reinvest the profits back into your business rather than withdrawing them.
Sales Tax
Carefully review the rules for sales taxes for each jurisdiction where you have either a physical presence location, travel to your clients, or otherwise have sales. Remember that what goods and services are or are not taxable varies by location.
Business Tax Receipt/Licensing Fees
In addition to income taxes, many states, counties, and municipalities charge a flat fee for the right to do business within their borders. This fee usually ranges from $50 to $200.
The fees often apply to any business operating in their area. This may include independent contractors who work for a single company or a service professional who travels to a single client within that area.
Payroll Taxes
If you hire employees, you don’t pay self-employment tax for them (or make them pay it). You’ll need to withhold and pay payroll taxes.
