Self-Employment Taxes

If you’re doing self-employed or 1099 work, you’ll need to pay self-employment taxes. Self-employment taxes replace the FICA taxes you’d have withheld at a W-2 job.

What is the self-employment tax?

The self-employment tax consists of two taxes.

The Social Security Tax funds Social Security retirement benefits. If you have six figures in annual earnings, you only pay this tax on your earnings up to the wage base limits. If you also have a salaried job with tax withholding, see the steps you can take to avoid paying too much Social Security Tax.

The Medicare Tax funds the Medicare health insurance program for retired adults. If you are a high earner, you may also have to pay the Additional Medicare Tax.

What is the self-employment tax rate?

The self-employment tax rate for most people is 15.3%. For higher earners, it depends on whether you’ve reached the Social Security Tax cap or have to pay the Additional Medicare Tax.

Social Security Tax

The Social Security Tax rate is 12.4%. If you’re above the income cap, you pay 12.4% on income up to the cap and then 0% on the rest of your income.

The tax rate remains consistent each year unless Congress changes it. The income cap is tied to inflation.

Medicare Tax

The Medicare Tax is 2.9% of all of your wages and self-employment income. Unlike Social Security, there is no income cap.

The Additional Medicare Tax is 0.9% (in addition to the 2.9%) of your income above the following limits:

  • $125,000 if married filing separately.
  • $200,000 if single or head of household.
  • $250,000 if married filing jointly.

These thresholds are fixed by statute and do not automatically increase with inflation. The Medicare Tax rates are also set by law and don’t change. 

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 business 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.

You can learn about how to budget for estimated tax payments in this article.

What counts as self-employed?

Self-employed includes most types of non-W2 jobs, including: 

You can learn more about different self-employment jobs and how to pay taxes for them under Tax Guides. 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.

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.

Conclusion

The self-employment tax consists of Social Security and Medicare taxes. You’ll probably need to make quarterly estimated tax payments for both your self-employment taxes and income taxes. If you need help tracking your taxes, check out these accounting software options.