The Self-Employment Tax

(July 2024)

The Self-Employment Tax

In This Article

Self-employment tax is a contribution that self-employed individuals and small business owners make to the federal government, supporting Social Security and Medicare programs. These initiatives offer benefits to retirees, disabled individuals, and qualifying dependents.

The self-employment tax aims to ensure that self-employed individuals contribute to the programs just as employees and employers do. Unlike employees and employers who split Social Security and Medicare taxes, self-employed individuals are responsible for both halves.

The self-employment tax rate is 15.3% of your earnings from your work, up to a certain amount.

If you make $400 or more from your work in a year (or $108.28 or more from a tax-exempt church job), you have to pay this tax.

You report it when you file your taxes using IRS Form 1040 Schedule SE. You deduct the amount you pay in self-employment tax from your total income, so it helps reduce what you owe.

  1. Why Self-Employment Tax?
  2. Calculate Self-Employment Tax
  3. Determine Your Net Earnings from Self-Employment
  4. Calculate Net Earnings Using Schedule C or Schedule C-EZ
  5. Know Qualifying Income and Expenses
  6. Understand Self-Employment Income Rules and Exceptions
  7. Calculate and Report Self-Employment Tax
  8. Deduct Half of Your Self-Employment Tax

Recap

1. Why Self-Employment Tax?

Self-employment tax offers several advantages for individuals working for themselves. Notably, anyone who is self-employed becomes eligible for Social Security and Medicare benefits based on the net earnings from self-employment.

Additionally, a noteworthy benefit is the ability to deduct half of the self-employment tax you pay from your taxable income, leading to a reduction in overall income tax liability.

As of 2023, the self-employment tax rate stands at 15.3% for the first $160,200 of self-employment income and 2.9% for any income surpassing this threshold.

Furthermore, there’s an additional 0.9% Medicare surtax applicable to self-employed individuals earning over $200,000 (or $250,000 for married couples filing jointly).

To manage and report your self-employment tax, individuals can use IRS Form 1040 Schedule SE.

2. Calculate Self-Employment Tax

To determine your self-employment tax, follow these key steps:

  • Sum up all net profits from your self-employment endeavors.
  • Factor in your self-employment tax deduction–multiply your net profit amount from step 1 with 0.9235. This yields your self-employment tax base.
  • Deduct wages you earn from W-2 employment from the annual wage limit. The annual wage limit sets the maximum earnings subject to the Social Security portion of self-employment tax, with the 2023 limit being $160,200.
  • Apply the self-employment tax rate, consisting of 15.3% (12.4% for Social Security and 2.9% for Medicare), to the lesser of your self-employment tax base or the difference between your annual wage limit and wages earned. This computation provides your final self-employment tax amount.

For accurate calculations, use Schedule SE (Form 1040 or 1040-SR).

3. Determine Your Net Earnings from Self-Employment

Net earnings from self-employment represent the income subject to self-employment tax for individuals and small business proprietors.

Unlike gross income or profit, you get your earnings after subtracting business expenses and depreciation. In simpler terms, it’s the amount remaining after accounting for the costs of running the business and the reduction in the value of assets over time.

4. Calculate Net Earnings Using Schedule C or Schedule C-EZ

To figure out your net earnings from self-employment, you need to complete either Schedule C or Schedule C-EZ, depending on the complexity of your business.

Schedule C is in detail, covering all income and expenses, while Schedule C-EZ is a simpler version for businesses with less than $5,000 in expenses and no inventory, employees, or home office deductions.

Once you fill out either Schedule C or Schedule C-EZ, you arrive at your business’s net profit or loss. Multiply it with 92.35%, representing the percentage of your self-employment income subject to the self-employment tax. This calculation provides you with your net earnings from self-employment.

To report your net earnings, use Schedule SE (Self-Employment Tax) and attach it to your Form 1040 or Form 1040-SR (U.S. Tax Return for Seniors).

Additionally, report your net profit or loss from Schedule C or Schedule C-EZ on Schedule 1 (Additional Income and Adjustments to Income), which you attach to your Form 1040 or Form 1040-SR.

5. Know Qualifying Income and Expenses

Eligible Incomes and Expenses

  • Wages, tips, commissions, fees, rents, royalties, and other earnings from your business activities.
  • Income from partnerships, S corporations, estates, and trusts on Schedule K-1.
  • Income from farming or fishing activities.
  • Clergy services that generate income.

Ineligible Income and Expenses

Interest, dividends, capital gains, and other forms of investment income.

  • Wages or salaries from an employer.
  • Income from rental real estate or personal property.
  • Earnings from certain types of limited partnerships.
  • Income from particular types of clergy services.

This distinction helps to determine the accurate net earnings from self-employment for tax purposes.

6. Understand Self-Employment Income Rules and Exceptions

Farming and Fishing

If you experience a loss or earn a small amount from farming or fishing, you have the option to use an alternative method to calculate your net earnings.

This choice enhances your social security benefits or tax credits. Additionally, you qualify to make a single annual estimated tax payment instead of quarterly payments under specific criteria.

Clergy

If you engage in ministerial services, you must pay self-employment tax on your net earnings unless you have an exemption.

Ministerial services encompass activities like performing religious ceremonies and administering religious functions.

Furthermore, certain requirements allow the exclusion of a portion or all of the housing allowance from net earnings.

Partnerships

In partnerships, self-employment tax applies to your share of the partnership’s net earnings, irrespective of whether you receive any distributions. Deducting your share of the partnership’s eligible expenses and depreciation is also permissible from your net earnings from self-employment.

>>>GET SMARTER: LLC Taxes: Full Guide

7. Calculate and Report Self-Employment Tax

Schedule SE serves as a tool to calculate and report the self-employment tax, which contributes to funding essential Social Security and Medicare programs.

To calculate your self-employment tax using Schedule SE, follow these steps:

  • Determine Net Earnings: Subtract business expenses and deductions from your gross income to find your net earnings from self-employment.

Multiply this amount with 92.35% to calculate the portion subject to self-employment tax.

  • Choose Short or Long Form: Opt for the short form if you have only one business and are not a minister.

Otherwise, use the long form, which includes additional sections and calculations.

  • Complete Schedule SE: Fill out the relevant sections depending on your form and situation.

Provide details such as net earnings, self-employment tax, and any applicable adjustments or credits.

  • Report on Form 1040 or Form 1040-SR: Enter the amount from Schedule SE onto Form 1040 or Form 1040-SR.
  • Attach Schedule SE to your tax return.

Examples

Short Form

If your sole proprietorship net profit is $50,000, multiply with 92.35% for net earnings ($46,175).

Calculate self-employment tax when you multiply net earnings with 15.3%, resulting in a tax of $7,064.

Long Form

If you have church employee income ($10,000), add it to sole proprietorship net profit to get combined net earnings ($55,410).

Calculate self-employment tax. Multiply combined net earnings with 15.3%, resulting in a tax of $8,477.73.

Multiple Businesses

Report your net profit or loss from each business on Schedule C.

Combine the results on Schedule SE, then calculate net earnings and self-employment tax.

8. Deduct Half of Your Self-Employment Tax

If you work for yourself or own a small business, you can lower your income tax. You can deduct half of your self-employment tax. This deduction mirrors how both employees and employers share Social Security and Medicare taxes.

Deduction = 1/2 × Self-employment tax

Report this deduction on Schedule 1, Additional Income and Adjustments to Income, when filing Form 1040 or Form 1040-SR.

For example, if your self-employment tax is $7,064.28, your deduction is $3,532.14. Enter this amount on Line 15 of Schedule 1 and attach it to your Form 1040 or Form 1040-SR.

When you apply this deduction, you can effectively reduce your taxable income.

Recap

Self-employment tax has perks—eligibility for Social Security/Medicare benefits and a deduction of half the tax from taxable income.

In 2023, the rate is 15.3% on $160,200 income, with a 0.9% Medicare surtax over $200,000. To calculate it, you deduct your wages from the annual limit, applying the rate to the lesser of your tax base or the difference.

Use IRS Form 1040 Schedule SE to report self-employment tax and your net earnings are vital for tax, excluding business costs. Use Schedule C or C-EZ to report net earnings, multiply with 92.35%, and report on Schedule SE, attaching it to Form 1040.

Exceptions exist for farming, fishing, clergy, and partnerships, and deducting half your tax lowers income tax—report on Schedule 1.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. . For comprehensive tax, legal or financial advice, always contact a qualified professional in your area. S’witty Kiwi assumes no liability for actions taken in reliance upon the information contained herein.

Become a

S'witty Kiwi Credit Insider!

Get the latest credit tips and hacks in your inbox!