If you are self-employed, it’s essential to understand how to calculate and file your self-employment tax. This guide will walk you through everything you need to know to ensure you’re doing it correctly. We’ll cover what counts as self-employment income, how to calculate your tax liability and more. So whether you’re a new business owner or want to ensure you’re doing things the right way, this guide is for you!
How to Calculate Self-Employment Tax
The first step in understanding how to file your self-employment tax is knowing how to calculate it. Self-employment tax is made up of two parts: Social Security and Medicare. The Social Security portion is 12.40%, while the Medicare portion is currently set at
Self-employment income can come from a variety of sources, including but not limited to:
- Freelance work
- Contract work
- Tips and gratuities
- Interest and dividends from investments
- Rental income from property you own
As long as the money you earn can be considered self-employment income, it is subject to self-employment tax. So how do you calculate it? Simply multiply your total self-employment income for the year by the Social Security tax rate (12.40%). For example, if your self-employment income for the year were $50,000, your Social Security tax would be $50,000 x 12.40%, or $62.
The second part of the self-employment tax is Medicare. The Medicare portion is currently set at 2.9%.
To calculate your Medicare tax, multiply your total self-employment income for the year by the Medicare tax rate.
After you’ve calculated both the Social Security and Medicare portions of your self-employment tax, you’ll need to add them to get your total self-employment tax liability for the year.
How and When to Pay Self-Employment Tax
Now that you know how to calculate your self-employment tax, it’s time to talk about how and when you need to pay it. The good news is that you don’t have to make quarterly estimated tax payments like many business owners do. Instead, you can pay your self-employment tax when you file your annual tax return.
However, even though you’re not required to make estimated tax payments, it’s still a good idea to set aside money throughout the year, so you’re not stuck with a large tax bill come tax time. A good rule of thumb is to set aside 30-35% of your self-employment income each month, so you’re prepared when it comes time to file your taxes.
How to File Self-Employment Tax
Filing your self-employment tax is pretty simple. You’ll need to fill out a few forms and send them in with your tax return. The first form you’ll need is a Schedule C, which is used to report your business income and expenses. Include all of your self-employment income from the year on this form.
The second form you’ll need is a Schedule SE. This form is used to calculate your self-employment tax liability. You’ll need to enter the amount of income you reported on your Schedule C and any deductions you’re claiming on this form. After filling out both forms, simply attach them to your tax return and send everything in!
That’s all there is to it! Now you know how to calculate and file your self-employment tax. Remember to set aside money throughout the year and fill out both forms when you’re ready to file your taxes.
What are the Self-Employment Tax Brackets?
Just like there are tax brackets for individual income taxes, there are also tax brackets for self-employment taxes. The current self-employment tax rate is 15.30%. If your self-employment income is less than $400, you won’t owe any self-employment tax. However, if your self-employment income is more than $400, you’ll owe self-employment tax on the entire amount.
Here are the current self-employment tax brackets:
- $0 – $400: 0%
- $400 – $900: 15.30%
- $900 – $5000: 28.60%
As you can see, the self-employment tax rate increases as your income increases. So if you’re self-employed and making a good income, set aside enough money each month to cover your self-employment tax liability.
The Bottom Line
Calculating and paying your self-employment taxes doesn’t have to be complicated or stressful. Remember to set aside money each month, fill out the necessary forms, and send everything in with your tax return. And if you have any questions, be sure to consult a tax professional. They can help you calculate your self-employment taxes and ensure you’re paying them on time.
