Calculating and Paying Self-Employment Tax

Consider paying self-employment tax as paying dues to join a select club of entrepreneurs who build businesses that hire workers; they are the foundation of our economy. Self-employment is freedom from taking instructions from bosses and living with an income dictated by others. If you remember nothing else, consider the fact that paying self-employment tax is only required if you are making profits in your business.

Paying Self-Employment Tax – How to Calculate What You Owe

You are only responsible for paying self-employment tax if you are making a profit in your business. You are only paying self-employment tax on the profit after all allowable expenses, credits, and deductions. The IRS defines self-employment tax this way: “Self-employment tax is a tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners.”

In 2021, the self-employment tax rate is 15.3%, and it consists of two partsi:

  • Social Security at 12.4%
  • Medicare at 2.9%

In 2021, this is charged on the first $142,800 in your self-employment income after expenses, deductions, and credits.

There is an additional 0.9% Medicare tax rate on income over specified levels:

  • Married filing jointly – $250,000
  • Married filing separate – $125,000
  • Single – $200,000
  • Head of household (with qualifying person) – $200,000

As you are self-employed, you are paying both sides of the social security because you are also the employer. The employer half of 7.65% is deductible on your personal tax return.

As an example, if you are self-employed and you report $250,000 in income from your business, you would pay:

  • 15.3% on $142,800
  • 0.9% on $50,000 ($250,000 – $200,000)

This would be $21,848 + the 0.9% addition of $450.

Paying Self-Employment Tax – Who Must Pay?

You must pay self-employment tax and file it on your Schedule E Form 1040 if:

  • Your self-employment net earnings not from church employment are $400 or more for the year.
  • You had church self-employment income of $108.28 or more.

As a self-employed individual, you normally file your income on Schedule C.

Paying Self-Employment Tax – Estimated Taxes

If your business is successful, the amount you owe in self-employment taxes each year will require that you pay estimated taxes. The IRS does not want you to go a whole year and have a large bill. They want quarterly estimated payments.

They are called “estimated” because they are based on the previous year’s income subject to self-employment tax. Working with your CPA, you would be given a schedule that is filed with your return and shows how much you owe each quarter and when to send it in to the IRS.

While you can consider paying self-employment tax as a burden, it is also an investment in your retirement years, though a forced one. Paying self-employment tax builds on your future social security payments and goes into a Medicare fund for medical expenses over age 65.

i Self-Employment Tax – IRS.gov

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