Being self-employed means not having a boss to answer to, but it also means that you’re responsible for a lot more when it comes to taxes. Not only do you have to make estimated tax payments throughout the year, but you also have to pay self-employment taxes if you have more than $400 in net earnings from self-employment.
The IRS counts you as being self-employed if you’re an independent contractor, a partner in a partnership or an LLC that is taxed as a partnership, or are generally in business for yourself. Learn the self-employment tax rules so you can be your own self-employment tax calculator.
Self-Employment Tax Rates for Tax Year 2017
Self-employment taxes consist of the Social Security tax and the Medicare tax. These taxes are also imposed on employees, but when you’re an employee, your employer pays half of the tax on your behalf.
The Social Security tax portion of self-employment taxes is 12.4 percent of your self-employment income and the Medicare tax rate is 2.9 percent. If you were an employee, both you and your employer would pay 6.2 percent in Social Security taxes and 1.45 percent in Medicare taxes. On the bright side, you’re allowed to deduct that portion of the self-employment taxes that would have been paid by your employer if you were an employee when calculating your income taxes.
Related: Self-Employment Tax Deductions
Limitations on Social Security Tax
The Medicare tax applies to all of your self-employment income no matter how much you make. The Social Security tax portion only applies to a maximum amount of your income each year, known as the Social Security contribution and benefit base. For the 2017 tax year, that amount is $127,200. It adjusts for inflation annually, and in 2018, it increases to $128,400.
If you have both employee and self-employment income and the total exceeds the contribution and benefit base, the Social Security taxes come out of your employment income first. For example, say in 2017 you earn $100,000 in employee income and $50,000 in self-employment income. You and your employer would split the Social Security taxes due to your employment income and then you would only pay the Social Security portion of the self-employment taxes on the first $27,200 of your self-employment income. However, you would pay the Medicare portion on all of your self-employment income.
Also See: This Is Which 1099 Form You Should File
Estimated Tax Payments
Your estimated tax payments to the IRS throughout the year need to cover both your federal income taxes and your self-employment taxes. To avoid taxes, your quarterly payments must total at least 90 percent of what you owe for the current year, at least 100 percent of what you owed for the prior year (110 percent if your income exceeds the thresholds for your filing status), or you owe less than $1,000 when you file your taxes. When you figure the amounts to pay, make sure to account for self-employment taxes you’ll owe, too.
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