Self Employment Tax

Self Employment Tax: Formula

How to calculate Self Employment Tax

Self Employment Tax is simply Social Security and Medicare taxes for a self-employed person.

However, Self Employment Tax is a much larger amount than what comes out of your paycheck as an employee. As an employee, 7.65% is deducted from your pay. The Self Employment Tax amount you will pay is almost twice what you pay as an employee. The reason for this is that your employer matches what comes out of your check so that 15.3% actually gets paid in to the Social Security Administration on your behalf. When you are self-employed, you are essentially both the employee and the employer. Since there is no one else to pay the other half for you, you get to pay them both. You do get a couple of breaks so that the amount is not quite double. We'll get to that in the computation section.

Self Employment Tax

You pay Self Employment Tax which again is simply Social Security and Medicare taxes for a self employed person on your net income from self employment. Self employment income is any income you earn for work you did that did not have taxes withheld from it.

Often people take on jobs without being certain what their employment status is, not even realizing that they are indeed self employed until they try to find a place for the income on their tax return. Common words people use to describe a self employed person are independent contractor, consultant, outside salesperson, outside contractor, and probably any other term that isn't "employee".

A business is a continuous, regular entity that has income or profit as its primary purpose. Independent contractors are self employed. Self employed workers control the methods and means of performing services for others. In contrast, employers direct or control the work of their employees. Self employment profit is self employment income minus self employment expenses, when self employment income is greater than self-employment expenses. Self employment profit increases the income that is subject to the Self Employment tax. Self employment loss is self employment income minus self employment expenses when self employment income is less than self employment expenses.

You also pay income tax on your net income from self employment based on whatever bracket you are in. So don't forget to estimate both types of tax, plus any state or city tax applicable in your area.

Many newly self-employed people are surprised at their Self Employment tax bills at the end of the year because they notice that they paid a lot more tax as a self employed person than they did as an employee. That’s because as a self-employed person, you pay two types of income taxes: the self employment tax, and the regular income tax. If you were previously employed by a company, the company basically paid half of the self employment tax, which covers your liability for Social Security and Medicare benefits.

The self-employment tax is based solely on the business income that you report on Schedule C. It is 15.3% of your net earnings from self employment as reported on Schedule SE.

The Self Employment tax consists of two portions:

  • 12.4% for Social Security. The Social Security portion of the self employment tax is limited to $10,527.60 for 2002 if you earn equal to or less than $84,900 ($84,900 earnings limit x .124 = 10,527.60). Once you hit $84,900 of self employment earnings, you have paid all you need to for Social Security.
  • 2.9% for Medicare. The Medicare portion of the self employment tax is unlimited. No matter how much, or how little you earn, you will be paying for Medicare.

Income tax is applied to the total income as reported on your tax return. We’ve seen situations where taxpayers had Schedule D losses that more than offset their Schedule C income, reducing or eliminating their total income, but they still owed SE tax with the return. While you can sometimes reduce or eliminate your income tax liability, if a Schedule C shows income after expenses, you will pay the Self Employment tax.

How to Calculate: Self- Employment Tax

You will calculate your self employment tax on Schedule SE. Begin with your net income from Schedule C. Multiply your net income by .9235 (which is 100% minus 7.65%). Multiply that result by .153 (which is 15.3%, the self employment tax percentage). You now have the amount of self employment tax you will pay. For instance, if you had $10,000 of net self employment income, your calculation would look like this: $10,000 x .9235 = $9,235, the amount subject to self employment tax$9,235 x .153 = $1,413, the amount of your self employment tax.

Home Tax Benefits - Deductions can be retroactive. The tax deductions and write-offs now available to taxpayers who run a small or home-based business, also apply to the past 3 tax years.

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