Self employment tax for small business owners is the Social Security and Medicare tax you pay on your own earnings. When you work for an employer, part of this tax comes out of your paycheck and your employer pays the rest. When you work for yourself, nobody withholds it for you, so you calculate and pay it on your own. Many new owners overlook this tax, and it can be a surprise at filing time.
This guide explains what self-employment tax is, how much it is, who must pay it, how to calculate it, and how to pay it. It includes a worked example with sample numbers. This article is general information, not tax advice, so talk with a qualified tax professional about your situation.
What Is Self-Employment Tax?
Self-employment tax, often called SE tax, consists of Social Security and Medicare taxes. It applies primarily to people who work for themselves, and it is similar to the Social Security and Medicare taxes withheld from most wage earners’ pay.
The key difference is who does the calculating. Employers figure these taxes for most wage earners. If you are self-employed, you figure your own SE tax on. In effect, you cover both the employee share and the employer share.
SE tax is separate from income tax. The IRS uses the term to refer only to Social Security and Medicare taxes, so you may owe income tax on top of it. The IRS explains the details on its IRS page on self-employment tax.
How Much Is the Self-Employment Tax Rate?
The self-employment tax rate is 15.3%. It has two parts:
- 12.4% for Social Security
- 2.9% for Medicare
The Social Security part applies only up to an annual earnings limit, and that limit changes from year to year. Check the current Schedule SE for the latest figure. The Medicare part applies to all of your net earnings.
Additional Medicare Tax
You may owe an additional 0.9% Medicare tax if your wages, compensation, or self-employment income exceed a threshold based on your filing status. Together with your spouse’s income if you file jointly, the thresholds include:
- Single: $200,000
- Married filing jointly: $250,000
- Married filing separately: $125,000
- Head of household (with qualifying person): $200,000
For more detail, see the IRS questions and answers on the additional Medicare tax.
Who Must Pay Self-Employment Tax?
You must pay self-employment tax and file Schedule SE if your net earnings from self-employment were $400 or more.
If you are a sole proprietor or independent contractor, you generally use Schedule C to figure your net earnings from self-employment. Our guide to independent contractor vs employee explains how workers are classified.
The rules apply no matter how old you are. They also apply if you are already receiving Social Security or Medicare. If your business is taxed in a different way, ask a tax professional how the rules apply to you.
How to Calculate Self-Employment Tax
Follow these steps:
- Figure your net profit. Use your records to determine your income minus your business expenses. Our guide to small business tax deductions explains common expenses.
- Figure your net earnings from self-employment. Schedule SE walks you through this step.
- Apply the rate. The tax is 15.3% on earnings up to the Social Security limit, and the Medicare part continues above it.
- Report the result. File Schedule SE with your Form 1040.
Self-Employment Tax Example (Hypothetical)
Here is a simple example. These numbers are hypothetical. To keep it simple, assume the owner’s net earnings from self-employment are $40,000 and are below the Social Security limit. In real life, Schedule SE shows how to figure your actual number.
- Social Security part: $40,000 × 12.4% = $4,960
- Medicare part: $40,000 × 2.9% = $1,160
- Total self-employment tax: $4,960 + $1,160 = $6,120
That equals 15.3% of $40,000. The owner can then deduct the employer-equivalent portion of the tax, which is the half that matches what an employer would pay. That half is $6,120 ÷ 2 = $3,060.
The Self-Employment Tax Deduction
You can deduct the employer-equivalent portion of your self-employment tax when you figure your adjusted gross income. The IRS says this deduction affects only your income tax. It does not reduce your net earnings from self-employment or your self-employment tax. Wage earners cannot claim a similar deduction.
Self-employed individuals may also be able to deduct the cost of health insurance. The instructions for Form 1040 and Schedule SE explain how to figure and claim it.
How to Pay Self-Employment Tax
To pay self-employment tax, you need a Social Security number or an individual taxpayer identification number.
Most self-employed people pay SE tax through estimated taxes. The IRS says you can use your quarterly estimated tax payments to pay your self-employment tax. Our guide to estimated taxes for small business explains how to figure and make those payments, and the Publication 505 gives more detail. Our guide to small business tax deadlines lists the dates.
Tips for Managing Self-Employment Tax
- Include it in your estimated payments. Estimated tax covers both income tax and self-employment tax.
- Set money aside. Put aside a portion of each payment you receive, so the tax does not come as a surprise.
- Keep clear records. Accurate income and expense records lead to a more accurate net profit. Our guide to small business bookkeeping explains how.
- Claim the deductions you qualify for. The self-employment tax deduction can lower your income tax.
- Ask a professional. A tax professional can confirm how the rules apply to your business structure. Our guide to a small business tax accountant explains how to choose one.
Common Self-Employment Tax Mistakes
- Forgetting the tax entirely. It applies even when you have a small income.
- Mixing it up with income tax. They are separate taxes.
- Skipping estimated payments. SE tax usually needs to be paid during the year.
- Assuming retirement age exempts you. The rules apply regardless of age.
- Missing the deduction. The employer-equivalent portion is deductible for income tax.
- Using old numbers. The Social Security earnings limit changes, so check the current form.
Frequently Asked Questions
What is self-employment tax?
It is the Social Security and Medicare tax that self-employed people pay on their net earnings.
What is the self-employment tax rate?
15.3%, made up of 12.4% for Social Security and 2.9% for Medicare. The Social Security part applies only up to an annual limit.
Who has to pay self-employment tax?
You generally must pay if your net earnings from self-employment were $400 or more.
How do I pay self-employment tax?
You file Schedule SE with your Form 1040, and you usually pay it throughout the year with estimated tax payments.
Can I deduct self-employment tax?
You can deduct the employer-equivalent portion when you figure your adjusted gross income. This lowers your income tax, but it does not reduce the self-employment tax itself.
Do I owe self-employment tax if I already receive Social Security?
Yes, the IRS says the rules apply even if you are already receiving Social Security or Medicare.
Conclusion
Self employment tax for small business owners is a regular part of working for yourself. Know the 15.3% rate, figure your net earnings on Schedule SE, take the deduction you qualify for, and pay through estimated taxes during the year. If you are unsure how it applies to your business, ask a qualified tax professional. This guide is general information and not tax advice.