Understanding the Self-Employment Tax in the U.S.
If you’re self-employed in the U.S., you are responsible for paying self-employment tax (SE tax) in addition to income tax. This tax covers your contributions to Social Security and Medicare, just like payroll taxes do for traditional employees. Here’s what you need to know.
1. What is Self-Employment Tax?
Self-employment tax consists of:
• 12.4% for Social Security (on income up to $168,600 for 2024)
• 2.9% for Medicare (on all self-employment income)
• Additional 0.9% Medicare tax (on income above $200,000 for single filers or $250,000 for married couples)
Total SE tax: 15.3% of net self-employment income.
2. Who Needs to Pay Self-Employment Tax?
You must pay SE tax if:
• Your net earnings from self-employment are $400 or more.
• You work as a freelancer, contractor, gig worker, or small business owner.
• You have partnership income from a business.
3. How to Calculate and Pay Self-Employment Tax
Step 1: Determine Your Net Earnings
• Use Schedule C (Profit or Loss from Business) to calculate your business income minus expenses.
Step 2: Apply the Self-Employment Tax Rate
• Multiply your net earnings by 92.35% (to adjust for the deductible employer portion).
• Multiply the result by 15.3% to get your SE tax amount.
Step 3: Pay Taxes Quarterly
• Self-employed individuals must pay estimated taxes quarterly (April 15, June 15, September 15, and January 15).
• Use Form 1040-ES to calculate and submit payments.
4. How to Reduce Your Self-Employment Tax
• Deduct half of the SE tax on your tax return.
• Set up an LLC and elect S-Corp status to reduce SE tax liability.
• Maximize business deductions (home office, equipment, internet, retirement contributions, etc.).
5. What Happens If You Don’t Pay?
• You could face IRS penalties and interest on unpaid taxes.
• The IRS may seize assets or garnish wages if taxes remain unpaid.
• Your future Social Security benefits may be affected.
