With the gig economy booming, more and more people are finding side hustles and weekend jobs to earn extra money — or 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 sole proprietor, or 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.
Self-Employment Tax Rates
The self-employment tax is a federal tax — there is no state self-employment tax — so your self-employment tax will be the same no matter where you live. The self-employment tax is comprised of two taxes: the Social Security tax and the Medicare tax. As of the tax year 2017, the Social Security tax rate is 12.4 percent and the Medicare tax rate is 2.9 percent. The Medicare tax applies to all of your self-employment income, no matter how much you make.
The Social Security tax, however, is only applicable to the amount of the contribution and benefit base for the year. This amount is $128,400 for 2018, but it adjusts annually for changes in the cost of living. So, in 2018, once you earn more than $128,400, you won’t have to pay the Social Security tax on the excess portion of your earnings.
Net Self-Employment Income
Before you can calculate your self-employment 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 deduct your business expenses first. For example, you can write off things like costs of goods sold, home office expenses, advertising and vehicle expenses.
How to Calculate Self-Employment Taxes
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 2018 contribution and benefit of $128,400, 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 –$128,400 for the tax year 2018 — multiply the result by 0.029 and add 15.3 percent of the contribution and benefit base.
For example, if your self-employment income is $150,000 instead of $50,000, you would multiply $150,000 by 0.9235 to get $138,525. Because that amount is greater than the contribution and benefit base is $128,400, subtract $128,400 from $138,525 to get $10,125. Multiply $10,125 by 0.029 to get $293.63. Then, multiply the contribution base of $128,400 by 0.153 to get $19,645.20 and add that to $293.63 to find your total self-employment tax for the year is $19,938.83.
Related: State Income Tax Rates Explained
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.
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:
- You owe less than $1,000 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.
- Your total tax payments during the year equal at least the amount of tax you owed the prior year. For higher-income taxpayers — your adjusted gross income exceeds $150,000 or $75,000 if you are married filing separately — your total tax payments must be at least 110 percent of the tax you owed the prior year.