Self-employment tax refers to the Social Security and Medicare taxes that self-employed individuals are required to pay. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. Self-employed individuals calculate and pay their self-employment tax using Schedule SE (Form 1040 or 1040-SR) and can deduct the employer-equivalent portion of their self-employment tax when calculating their adjusted gross income .
Who Must Pay Self-Employment Tax?
Self-employment tax is primarily for individuals who work for themselves. If you have net earnings from self-employment of $400 or more, you are generally required to pay self-employment tax. However, there may be exceptions or specific rules based on your specific type of business. It is recommended to consult the Internal Revenue Service (IRS) or a tax professional for more information regarding your specific situation .
How Do I Pay Self-Employment Tax?
Since self-employed individuals do not have an employer withholding Social Security and Medicare taxes for them, they are responsible for making payments towards their income taxes. To pay self-employment tax, you can use Form 1040-ES, Estimated Tax for Individuals, which is used to figure Social Security and Medicare taxes as well as income tax. The form contains a worksheet similar to Form 1040 or 1040-SR to help you determine if you are required to make quarterly estimated tax payments. Additionally, the form includes blank vouchers that can be used to submit your payments .
Self-Employment Tax Rate
The self-employment tax rate for 2023 is 15.3% of net earnings. This rate is the sum of a 12.4% Social Security tax and a 2.9% Medicare tax on net earnings. It is important to note that self-employment tax is separate from income tax, and the first $160,200 of earnings in 2023 is subject to the Social Security portion .
Reporting Self-Employment Income
When reporting self-employment income, you should report your net income on Schedule C of your federal tax return. Net income is calculated by subtracting business expenses from your total self-employment income. It is important to keep accurate records of your income and expenses for tax purposes .
Additional Taxes for Self-Employed Individuals
In addition to self-employment tax, self-employed individuals may also be required to pay other taxes, such as federal income tax, state income tax, and local income tax, depending on their location and specific circumstances. It is advisable to consult the IRS and state/local tax authorities or a tax professional for guidance on the specific tax obligations for self-employed individuals in your area .