Self-employment tax is a mandatory tax that self-employed individuals must pay to cover Social Security and Medicare contributions. It is similar to the Federal Insurance Contributions Act (FICA) tax that employers and employees pay, but self-employed individuals must pay both the employer and employee portions.
Self-employment tax applies to individuals who earn at least $400 from self-employment in a tax year. This includes:
As of the latest tax year, the self-employment tax rate is 15.3%, which consists of:
Individuals earning more than $200,000 (single filers) or $250,000 (married filing jointly) must pay an Additional Medicare Tax of 0.9% on income exceeding these thresholds.
To determine self-employment tax:
Example Calculation:
Self-employed individuals do not have taxes withheld from their income, so they must make quarterly estimated tax payments to the IRS using Form 1040-ES. Payments are due on:
Self-employed individuals can deduct the employer-equivalent portion (half) of their self-employment tax when calculating their adjusted gross income. This deduction reduces taxable income but does not affect net earnings for Social Security or Medicare.
For more details, visit the IRS website on self-employment tax.