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Self-employed Tax Calculator

How much is self-employment tax?
Use this calculator to estimate your self-employment taxes. Normally these taxes are withheld by your employer. However, if you are self-employed, operate a farm or are a church employee you may owe self-employment taxes. Please note that the self-employment tax is 12.4% for the Federal Insurance Contributions Act (FICA) portion and 2.9% for Medicare. The FICA portion funds Social Security, which provides benefits for retirees, the disabled, and children of deceased workers.

 

Understanding Self-Employment Tax

If you are self-employed, meaning you work for yourself as a "freelancer" or "business owner", you may have a million questions during tax season. As a self-employed individual your take-home pay will be, in most cases, significantly higher than if you were working for someone else. This also means you don't have deductible benefits, such as healthcare, 401k, or other financial costs, and taxes are not taken from your take home pay. Having extra money in your pocket is just a temptation to spend it all, and when tax time is approaching, many self-employed individuals are wondering where they will get the money in order to pay their taxes for the previous year. As a self-employed individual or business owner you should never be fooled into thinking that all of the money you bring home belongs to you. Taxes are a requirement, as long as you have yearly net income over $400.00. Financial literacy is a critically needed skill, and that knowledge includes learning and understanding the rules of taxation. In this article you will learn how to estimate your self-employment taxes, but first you must understand a few things about self-employment as it relates to taxation.

There are many benefits to being self-employed or a business owner. If you are self-employed you can claim tax relief on charitable donations and pension contributions, which can be deducted from annual profits.

Picture of 1040 form.

Some General rules to filing any category of taxes:

  • Keep good records including mileage, receipts, etc.;
  • Place yourself on a budget as it relates to paying taxes throughout the year;
  • Take advantage of even the smallest deductions.

As a self-employed individual you may have to file estimated taxes on a quarterly basis.

If self-employed individuals do not pay enough tax throughout the year they may be subject to the underpayment penalty even if they are due a refund. The only way to avoid this penalty is if you owe less than $1,000.00.

What are self-employment taxes?

Self-employment tax is money paid to the federal government to fund Social Security and Medicare. Each self-employed individual must pay this tax once they have a net income of $400.00 or more in any given tax year. Every business and employee are required to pay this tax. However, when an individual is self-employed, he or she is both the business and the employee, therefore having to pay both shares of this tax.

What is self-employment tax based on?

Self employment tax is paid in addition to regular income tax. As stated above, self-employment tax substitutes Medicare and Social Security taxes. Self-employment taxes are usually the largest federal tax liability for larger business owners with many employees.

What does self-employment tax consist of?

The self-employment tax rate is currently, approximately 15.3%. This rate consists of the two parts mentioned above. Medicare taxes are (2.9%) of earned income and Social Security taxes are (12.4%) of earned income.

What are the limits on self-employment taxes?

There is currently no maximum limit for the Medicare portion, which totals (2.9%). The IRS self-employment limits for the Social Security portion for 2016 is $118,500, which is subject to (12.4%) of the self-employment tax. High income individuals may be assessed an additional Medicare tax equal to 0.9% of any income above the threashold amount.

Filing Status Threshold Amount
Married filing jointly $250,000
Married filing separately $125,000
Single $200,000
Head of household $200,000
Qualifying widow(er) with dependent child $200,000

How can self-employment tax be minimized?

  • First, you will need to establish the amount of your net income from self-employment. To do this you must review all of your self-employment expenses and then subtract your total revenue. You will complete this step to be sure that you have maximized all of your deductions. As a general rule, you will pay less self-employment tax if your net income is low.
  • Second, since health insurance is a requirement, you must deduct the total health insurance premiums paid on yours and your family's behalf. This will be deducted from your net income. Due to the fact the premiums do rise yearly, you should be careful not to overlook this particular deduction.
  • Third, you should analyze your business to ascertain whether you can change your business from self-employed to an S-Corporation. S-Corporations are a special structure of business, which means the business is not subject to double taxation because it is not required to pay corporate income tax from the profits of the company. With this being said, if you have an S-Corporation, a portion of your salary can be taken as dividend payments, which are not subject to self-employment tax.
  • You will then do what most self-employed and individual business owners often forget to do. You will always reduce you net income by (7.65%). You will complete this step in order to figure out what amount of your net income is subject to the self-employment tax. For example: If you earned $200,000, this amount will be reported on the 1040 tax form (Schedule C, Line 12). However, only $184,700 will be subject to self employment tax.
  • Last, because self-employed individuals are allowed to decrease their overall taxable income, the self-employed should report only half of the their self-employment taxes on line 27 of the 1040 form. This is considered the employer portion of self-employment tax. This step will not decrease self-employment tax; it will, however, reduce tax liability.

When should self-employment taxes be paid?

Usually the filing of self-employment estimated taxes are due by the 15th of April, June, September, and January. The only exception is when the 15th falls on the weekend or holiday.

What should you do if your self-employment taxes are overdue?

The first thing you should know is that no matter if you are able to pay your taxes you should always, still file on time. Anytime you are unable to pay your taxes or even unable to pay in full, The Internal Revenue Service (IRS) does have several avenues which are helpful to the taxpayer. You can do a few things:

  • Request an extension of up to (120) days to pay in full by applying with the online payment agreement or by calling 800-829-1040
  • If you just simply need more time to pay you can request an installment agreement.
  • Lastly, you may also qualify for an offer in compromise, which means the IRS may settle for a lesser amount than what you actually owe.

Now, for those of you who just wanted to know how to calculate your estimated self-employment tax, you can certainly do so by following the guidelines and instructions on the Long Schedule SE form or you can follow the steps below:

  1. First, you determine what your net income is for a particular tax year, this is after you deduct any tax-deductible expenses.
  2. Second, once you know what your net profit was, you find the amount that is considered taxable income. You will do so by multiplying you net profit by (7.65% or 0.9235).
  3. Once you have established your taxable self-employment income you will then multiply that number by the total amount for Medicare and Social Security taxes, which together, equals (15.3%).
  4. At this point you will have the amount of your self-employment tax.
  5. The last step is to split the number in half, and that is the amount which will be deductible from your taxable income.

To summarize in short:

  • Self-Employment tax consists of paying Social Security and Medicare taxes
  • Remember as a self-employed individual you are considered as both, the employer/business and the employee. Medicare and Social Security tax rates are doubled for the Self-employed are currently equal to (15.3%)
  • Self-employment taxes must be paid if at least 400.00 are earned in net profit throughout the year
  • Maximize deductions and expenses, and healthcare
  • Social Security earnings are limited to $118,500, which is the same limit that applies to employees. However, the Medicare portion does not have a limit
  • The total of Self-employment tax is always your net profit multiplied by (7.65%), which is then multiplied by (15.3%) and that number split in half

Remember that the rules of self-employment tax can be involved and sometimes difficult to understand. Do not let the fear of owing or paying taxes yearly or quarterly scare you away from working for yourself. If you are newly self-employed and you are not sure, be sure to keep detailed records and please consult with a CPA for advice. If you plan properly and have financial discipline, paying taxes should be easy and less painful for you.