How Much Will I Owe on Self-Employment Taxes?

Are you self-employed?

Then you have the chance to take advantage of a range of different tax breaks. You have flexibility, but you can also benefit from the same tax breaks business owners do.

There are also disadvantages. You must cover both the employer and employee parts of payroll taxes. These taxes go towards Social Security and Medicare.

The maximum tax rate for you is 15.3%. There’s also a wage limit that applies to Social Security, introduced in 2016. It’s valued at $118,500. The 2.9% of your self-employment taxes towards Medicare don’t have a maximum cap. If you’re a high-income taxpayer, you may have to pay an additional 0.9%.

Let’s look at how self-employment taxes work and how to claim self-employment tax deductions.

The Two Parts of Self-Employment Taxes

Self-employment taxes are made up of two parts: Medicare and Social Security.

Normally, you pay 6.2% towards Social Security, and your employer pays the other 6.2%. This applies to the initial $128,400 of your salary. After that, you pay 1.45% of your salary for Medicare, with no upper limit.

But if you’re self-employed you cover both parts; therefore you’re paying double these figures. However, you can deduct the amount the employer normally pays.

An additional 0.9% in Medicare taxes are levied if you’re a single filer and earned over $200,000. If married and filing jointly, this goes up to $250,000. However, if you’re married but filing separately, the limit is only $125,000.

You Must Pay all of Your Self-Employment Tax

Self-employment taxes are there so that the Federal government can get all the payroll taxes they’re owed. Typically salaried employees see their employer withholding money for these taxes. The total rate is 7.65%. The employer then matches that 7.65%.

Self-employed people don’t have employers to match their contributions, so they must cover everything. Therefore, the 15.3% must come solely from you. The profits are defined as net earnings minus the employer share of these taxes.

Sounds complicated? We recommend using a self-employment tax calculator to estimate what you’ll have to pay.

Anyway, the whole 15.3% tax only applied up to $118,500 in 2016 is a base. After this, only 2.9% of Medicare tax applies, with an additional 0.9% for high earners.

What Happens if I Have Multiple Types of Income?

This is where it can get complicated. Some salaried employees have side businesses, so they earn both types of income.

The IRS says that regular employment income takes precedent against the wage limit. Self-employment taxes continue to apply, but they will likely be less. It all depends on how much you earn from your regular job and how much you paid through that.

Calculating Self-Employment Tax

Let’s use a couple of examples to illustrate how self-employment tax is calculated manually.

Person X makes $30,000 from their self-employment activities and earned nothing from other income sources. It works by taking 7.65% away from that gross income. You now have the taxable part, which is $27,705.

You then figure out what 15.3% of $27,705 is. That’s $4,239, of which 50% of it can be deducted. So, your income tax liability is $2,119 for the year.

On the other hand, Person Y makes $30,000 from their own business. But they also have a regular day job, which brings in a $125,000 salary each year.

So, we can see that the social security portion of these taxes is covered solely from the day job. So, person Y doesn’t have to worry about paying self-employment taxes on Social Security. But she has taxable earnings of $27,705 from her own business. This will be subject to Medicare taxes.

The total self-employment tax would be $803, with a $402 deduction against Person Y’s liability.

It can be complicated to figure out how much you’ll owe. The self-employment tax calculator can do this for you.

Never Pay More Than Necessary

Remember that self-employment tax is always levied against the net income from your own business. Any deductible expenses are taken from the total revenue generated by the company. So, then the income is reduced in calculating self-employment tax.

You must, therefore, take every deduction you possibly can. They’re extremely valuable.

If you happen to owe a large amount in self-employment taxes, you do have the option of making estimated tax payments every quarter. This is important because the IRS can hit you with fines if you don’t pay enough throughout the year.

Self-employment taxes are a constant thorn in the sides of the self-employed. Therefore, it’s important to estimate what you might need to pay in advance to avoid getting stressed out when tax season officially rolls around.

Keep in mind, if you file your taxes online, they will ask you the correct questions to let you know which self-employed tax deductions you qualify for and guarantee you will pay the least amount of tax possible.