What is the self-employment tax?

racking and paying your taxes can be a confusing process, but it's a vital part of being an entrepreneur. If you work for yourself, you must pay taxes to the federal government on your self-employment income. Taxes aren't automatically deducted from your gross earnings since you don't receive a traditional paycheck like an average employee. 

As a small business owner, paying your taxes doesn’t have to be intimidating. In fact, with Novo, you can even integrate your business checking account with bookkeeping services like Quickbooks and Xero for seamless financial tracking, making tax season easier than ever. Here's a closer look at the self-employment tax, how much you're required to pay, and how to pay.  

What is the Self-Employment Tax?

The self-employment tax is a federal tax paid by individuals who work for themselves. This 15.3% tax includes Social Security and Medicare. As a self-employed entrepreneur, you have to pay these taxes manually since you don’t have an employer to deduct them automatically from your paychecks. If you've ever held a W-2 job before, you may have noticed the FICA tax already deducted from your paycheck. FICA is the tax that encompasses Social Security and Medicare. Employers automatically deduct the necessary taxes from employee wages, but this responsibility falls on you if you are self-employed. 

Who must pay Self-Employment Taxes? 

Typically, all self-employed people must pay self-employment taxes. The IRS offers some guidelines that further specify who is subject to self-employment tax:

• Individuals whose net self-employment earnings (excluding church employee income) were $400 or more in one tax year.
• Individuals with church employee income of $108.28 or more in one tax year.
  

Particular situations and rules within IRS guidelines may change how specific individuals handle taxes, like family caregivers. Still, for the most part, if you are a sole proprietor, independent contractor, freelancer, or part of a small business partnership, you have to pay self-income taxes. 

It's also important to note that this distinction doesn't take age into account. According to the IRS, the rules above apply to everyone self-employed, even if you are already receiving Social Security or Medicare benefits. 

Self-Employment Tax rate 

The current self-employment tax rate is 15.3% of your net earnings. The government divides this amount into two distinctions: 12.4% for Social Security and 2.9% for Medicare. 

With traditional payroll taxes, employers and employees split the cost of Social Security and Medicare taxes. As a self-employed business owner, you are considered the employer and employee, so you must pay both halves of these taxes. 

The Social Security portion of the self-employment tax is wage-based, so only a part of your business income may be subject to this tax. For tax year 2021, only the first $142,800 of earned income will be subject to this tax portion. 

On the other hand, you may be required to pay an additional 0.9% based on your net earnings. In 2021, you were subject to paying the extra tax if your net earnings exceed $200,000 (if you’re a single filer) or $250,000 (if you’re a joint filer).

Tax Deductions for Self-Employed 

You can lower your taxable income by taking advantage of several available tax deductions and tax credits.

First, you can deduct the employer-equivalent portion of self-employment taxes when calculating your adjusted gross income.

Other tax deductions that may be available if you are self-employed include: 

• Home office expenses
• Phone and internet
• Health insurance premiums
• Business meals
• Business travel
• Vehicle use and related expenses
• Credit card and loan interest
• Publications and subscriptions
• Continuing education
• Business insurance 
• Rent
• Start-up costs
• Advertising
• Retirement savings
• Memberships
• Business income 
  

The IRS has specific rules and regulations on how and when to deduct business expenses. What you can deduct often depends on your situation. Consult a tax professional for guidance on what to deduct. 

One of the best things you can do as a self-employed individual is to keep detailed records of all expenses, big and small. You never know when you might be able to deduct an expense. Figure out a strategy for filing and tracking expenses that works for you and stick with it. With Novo, you can keep track of what kinds of purchases you’re making by categorizing your transactions. Hiring a bookkeeper can also help you stay organized each month. 

Requirements to Pay Self-Employment Taxes 

To pay the self-employment tax, you will need either a social security number or an individual taxpayer identification number (ITIN). A Social Security Administration handles assigning social security numbers. You can apply for an ITIN through the IRS. 

How to Pay Self-Employment Taxes 

Typically taxes are paid either throughout the year through paycheck withholdings or estimated tax payments. Most self-employed individuals pay quarterly estimated taxes. If you expect to owe more than $1,000 when you file your tax return, you are probably required to make estimated tax payments. The IRS may charge you a penalty if you don't pay enough in estimated taxes throughout the year. 

Determining how much you have to pay in estimated taxes can be tricky. In most cases, you'll use IRS Schedule C to calculate net earnings from self-employment, then IRS Schedule SE to calculate how much self-employment tax you owe. That amount is reported in the "Other Taxes" section of Form 1040 since self-employment taxes are different from income taxes. 

The IRS also provides IRS Form 1040-ES that offers more guidance on estimated taxes and a worksheet you can use to calculate estimated taxes. This form also includes quarterly tax payment vouchers you must send in with a check to the IRS if you choose to mail in payments. 

Depending on your situation, you may also need to file other IRS forms with your tax return, like Schedule 1, Schedule 2, Form 4562, and other documents. Alternatively, several self-employment tax calculators are available online to help you determine how much you are required to pay. A tax professional can also help you determine your estimated tax obligation.

The year is split up into four quarters, with estimated tax payments currently due by the following dates: 

• April 15 (Quarter January 1 to March 31 quarter) 
• June 15 (May 31 – June 15 quarter)
• September 15 (June 1 to August 31 quarter) 
• January 15 of 2023 (September 1 to December 31 quarter)
  

The IRS wants to make it easy for individuals to pay taxes. They've provided a host of ways to make estimated tax payments, including:

• Online through IRS Direct Pay
• Through the RS2Go mobile app
• By phone
• By mail
  

If you're struggling to make full tax payments, you can apply to make installment payments to the IRS. You may also qualify for a temporary collection delay if you face hardship. 

Staying on top of the self-employment tax is one of the costs of working for yourself. That said, it's just a different way of paying taxes since you don't receive a traditional paycheck. Self-employment provides several perks that can make paying additional taxes worth it such as personal autonomy and joy in your work. Plus, you may qualify for several deductions that can lower your tax obligations considerably. 

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Consult a tax professional for more detailed information to help you navigate self-employment taxes and find available deductions based on your situation.

Kevin Payne is a personal finance and travel writer. His work has appeared on websites like Forbes Advisor, Investopedia, Credit Karma, and FinanceBuzz. He is the family travel and budget expert behind FamilyMoneyAdventure.com. Kevin lives in Cleveland, Ohio, with his wife and four kids.