Everything You Need to Know About Self-Employment Tax

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With the gig economy booming, and COVID-19 forcing more and more people to take side hustles and weekend jobs to earn extra money — some are even opting to make the leap into full-time self-employment. But, when you start working for yourself, you might have to pay different taxes, including the federal self-employment tax.

The IRS considers you self-employed when you’re in business for yourself, such as an independent contractor or if you have a sole proprietorship, or are a partner in a partnership, including an LLC that is taxed as a partnership. Read on to learn how to calculate self-employment taxes, no matter which state you live in.

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Self-Employment Tax Rates

The self-employment tax is a federal tax — there are no self-employed state taxes — so your self-employment tax by state will be the same no matter where you live. What is self-employment tax? The self-employment tax is comprised of two taxes: the Social Security tax and the Medicare tax. As of the tax year 2021, the Social Security tax rate is 15.3 percent–that’s 12.4 percent for Social Security and 2.9 percent for Medicare. The Medicare tax applies to all of your self-employment income, no matter how much you make.

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The Social Security tax, however, is only applicable to the amount of the contribution and benefit base for the year. This amount is $142,800 for 2021, but it adjusts annually for changes in the cost of living. So, in 2021, once you earned more than $142,800, you won’t have to pay the Social Security tax on the excess portion of your earnings.

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Net Self-Employment Income

Before you can calculate your self-employment or independent contractor taxes, you need to calculate your net self-employment income. Instead of having to pay self-employment taxes on every dollar you make from self-employment, you are permitted to take out self-employment tax deductions first. For example, you can write off things like the costs of goods sold, home office expenses, advertising and vehicle expenses. There’s also a self-employed health insurance deduction.

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How to Calculate Self-Employment Tax 2021

To calculate self-employment taxes, multiply your net self-employment income by 0.9235. Then, if the result is less than the contribution and benefit base for the year, multiply the result by the total self-employment tax rate, currently 15.3 percent.

For example, if your net self-employment income is $50,000 multiply $50,000 by 0.9235 to get $46,175. Then, because $46,175 is less than the 2021 contribution and benefit of $142,800, multiply $46,175 by 0.153 to find you owe $7,064.78 in self-employment taxes for the year, which would leave you with $42,935.22.

But you’ll still have to pay regular income taxes at both the federal and state level, just like you would have to pay on any other income. On the bright side, you get to deduct an amount equal to the employer portion of the self-employment taxes — currently one-half of the total self-employment taxes — from your taxable income when you’re calculating your income taxes. In this case, your self-employment taxes paid would earn you a deduction of $3,532.44 on your income taxes.

In case your self-employment income equals more than the contribution and benefit base — $142,800 for the tax year 2021 — multiply the result by 0.029 and add 15.3 percent of the contribution and benefit base.

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Reporting Self-Employment Income on Taxes

You report your self-employment income on your regular income tax return, but you have to file a few additional forms. First, use Schedule C to calculate your net self-employment income. Then, file Schedule SE as a self-employment tax calculator to figure the self-employment taxes you owe.

Both your net self-employment income and your self-employment taxes will be carried over to your Form 1040 tax return. Filing your taxes correctly with self-employment income is important to avoid additional interest, penalties or an IRS audit.

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Making Estimated Payments

When you’re self-employed, you’ll usually need to make estimated tax payments throughout the year. Underpayment of taxes can result in a penalty. Generally, you won’t have to pay a penalty if you meet at least one of the following criteria:

Generally, most taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and refundable credits, or if they paid withholding and estimated tax of at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller.

  • You owe less than $1,000 (after subtracting withholding/refundable credits) when you file your return.
  • Your total tax payments during the year equal at least 90 percent of your total tax bill for the current year or 100% of the tax from the prior year.
  • There are also special rules for farmers and fishermen, certain household employers and certain higher income taxpayers, which can be found in this IRS document.

You don’t have to pay estimated taxes for the current year if you meet all three of the following conditions:

  • You had no tax liability for the prior year
  • You were a U.S. citizen or resident for the whole year
  • Your prior tax year covered a 12-month period

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    Jordan Rosenfeld and Gabrielle Olya and contributed to the reporting for this article.

    Last updated: Feb. 10, 2021

    About the Author

    Michael Keenan is a writer based in the Kansas City area, specializing in personal finance, taxation, and business topics. He has been writing since 2009 and has been published by Quicken, TurboTax and The Motley Fool.

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