What is self-employment tax?
If you are self-employed, you generally must file a Schedule SE, Form 1040, and pay an additional tax on your self-employment income. The federal government uses this tax to fund Social Security and Medicare benefits. The self-employment tax rate on net earnings is 15.3 percent, with 12.4 percent of this rate for Social Security and 2.9 percent for Medicare. The maximum amount subject to the Social Security portion of the tax rate is currently $147,000 (up from $142,800 in 2021). All net earnings of at least $400 are subject to the Medicare portion of the tax rate.
Caution: For tax years after 2012, an additional 0.9 percent Medicare surtax applies to wages and self-employment income in excess of $200,000 for single taxpayers and over $250,000 for married couples filing joint federal income tax returns ($125,000 for married individuals who file separate returns).
Who pays self-employment tax?
You pay self-employment tax if you have self-employment income. Generally, self-employment income is income earned:
- As an independent contractor
- As a sole proprietor of a business or trade
- As a member of a partnership
- From running any type of for-profit business yourself
Can you be both self-employed and an employee?
Yes, self-employment income can be from work you do in addition to your full-time business or from part-time work you do in addition to your full-time job.
Example 1: You work full-time as an accountant and are paid a salary. In addition, you do accounting separately for your own clients from an office in your home. The income from these separate clients is self-employment income.
Example 2: You run a T-shirt production and sales business from a space you've rented. Income from this business is self-employment income.
Self-employment tax is calculated and reported on Form 1040, Schedule SE
If you file a Schedule C as a sole proprietor, independent contractor, or statutory nonemployee, the income listed on your Schedule C is self-employment income and must be included on Schedule SE. Schedule SE is used both to calculate self-employment tax and to report the amount of tax owed.
Tip: If you elect to file a Schedule C as a statutory employee, that income is not subject to self-employment tax and need not be included on a Schedule SE.
Limitations on self-employment tax
The Schedule SE tax is divided into two portions: Social Security tax (12.4 percent) and Medicare tax (2.9 percent). All income reported on your Schedule SE (net earnings of at least $400) is subject to the Medicare tax. However, your overall Social Security tax is limited to $147,000 (in 2022, $142,800 in 2021) of income.
Example 1: If you are a salaried employee in addition to running a self-employed business on the side, the wages you are paid as an employee (and on which a Social Security tax is withheld) will lower the amount of Schedule SE Social Security tax you must pay, and if these wages total $147,000 or more, you won't have to pay any Schedule SE Social Security tax.
Example 2: If all of your income is self-employment income, you will pay Social Security tax only on the first $147,000.
Tip: If 92.35 percent of your Schedule SE income is less than $400, you won't be subject to any Schedule SE tax.
Caution: For tax years after 2012, an additional 0.9 percent Medicare surtax applies to wages and self-employment income in excess of $200,000 for single taxpayers and over $250,000 for married couples filing joint federal income tax returns ($125,000 for married individuals who file separate returns).
Steps for figuring self-employment tax
Figure your net self-employment income
Net self-employment income generally includes all business income less all business deductions allowed for income tax purposes. You have to claim all allowable deductions when figuring out your net self-employment income. If you have more than one business, you must combine the net profit or loss from each business to determine your net self-employment income.
Figure your net earnings from self-employment
The net self-employment income subject to self-employment tax is referred to as net earnings from self-employment. There are three ways to figure net earnings from self-employment: the regular method, the farm optional method, and the nonfarm optional method. Under the regular method, you multiply your net self-employment income by 92.35 percent (.9235) to get your net earnings.
You have to use the regular method unless you qualify to use one or both of the optional methods. Generally, you can use one of the optional methods if you have a loss or only a small amount of self-employment income, and you:
- Want to take greater advantage of the earned income credit (the optional methods generally increase your earned income, which could increase your credit)
- Want to receive credit for Social Security benefit coverage
- Want to take a credit for child or dependent care expenses you incurred (the optional methods generally increase your earned income, which could increase your credit)
For information on the optional methods of figuring your net earnings from self-employment, see IRS Publication 533, Self-Employment Tax.
Multiply your net earnings by the tax rate
Multiply your net earnings from self-employment by the tax rate to determine your self-employment tax. The self-employment tax rate is 15.3 percent; 12.4 percent is for Social Security tax, and 2.9 percent is for Medicare tax. No more than $147,000 of your combined wages, tips, and net earnings is subject to the 12.4 percent Social Security part of the self-employment tax. See Schedule SE and instructions for details.
Caution: For tax years after 2012, an additional 0.9 percent Medicare surtax applies to wages and self-employment income in excess of $200,000 for single taxpayers and over $250,000 for married couples filing joint federal income tax returns ($125,000 for married individuals who file separate returns).