Self-employment tax rates have remained constant for many years, but the amount of income subject to the tax increases slightly every year for inflation. Self-employment tax is the equivalent of payroll taxes paid by employees and is due on income earned by sole proprietors, freelancers, and independent contractors. Self-employment tax is due regardless of whether you received a 1099-MISC for your services.
What Is Self-employment Tax?
The self-employment tax rate includes both Social Security and Medicare taxes. It is the equivalent of payroll taxes, sometimes referred to as the 1099-MISC tax rate, and paid by employees and employers. However, self-employment taxes are double the employee rate because self-employed individuals must pay the equivalent of both the employer and employee’s share of payroll taxes.
Self-employment tax is separate from income tax, although it is reported on the individual income tax return. Sole proprietors and freelancers must pay both income tax and self-employment tax on their earnings. Two taxes might seem unfair, but it is the equivalent of employees paying both payroll taxes and income taxes.
Self-employment Tax Rate Table for 2019 & 2020
Social Security Tax
12.4% on the first $132,900 of wages and self-employment (SE) income
2.9% of wages and SE income
12.4% on the first $137,700 of wages and SE income
2.9% of wages and SE income
The $137,700 limit (for 2020) for income subject to Social Security tax includes both income from wages and self-employment income. So, if you earn $100,000 in wages during the year, the maximum self-employment income subject to Social Security tax is $37,700. I’ll go into more detail on the calculation of self-employment tax later.
Only your income net of expenses is subject to self-employment tax. I highly recommend using accounting software to track your income and expenses during the year. If you don’t already have accounting software, Fit Small Business recommends QuickBooks Online as the best overall software for small businesses.
Additional Medicare Tax Rate for 2019 & 2020
Employees and self-employed taxpayers must pay an additional Medicare tax of 0.9% if their combined wages and self-employment income exceeds a certain amount.
0.9% Tax on Wages and SE Income in Excess of
Married Filing Jointly
Married Filing Separate
Single or Head of Household
The additional Medicare tax is not part of self-employment tax. Self-employed taxpayers report the tax on the individual tax return in the same way as employees.
Who Has to Pay Self-employment Tax?
Anyone who makes $400 or more in self-employment income must pay self-employment taxes. Self-employment income is any income earned by carrying on a trade or business organized as a sole proprietorship or partnership.
Here are a few examples of people subject to self-employment tax:
- Sole proprietors, which is any trade or business owned by one person that is not organized as a limited liability company (LLC) or a corporation
- Partners in a partnership
- Members (owners) of an LLC taxed as a sole proprietorship or partnership
- Independent contractors and freelancers, such as Lyft and Uber drivers
Sole proprietors and partnerships should receive Form 1099-MISC from any customers who pay them more than $600 during the year for services. However, the income you receive is taxable regardless of whether or not you receive a Form 1099-MISC.
How to Calculate Self-employment Taxes
Most tax return software will calculate your self-employment taxes. I recommend TurboTax for your small business. TurboTax will calculate your self-employment taxes for you as well as complete Schedule SE and any other supplemental forms. Start your return for free and pay only when you file.
If you want to calculate self-employment tax by hand, or to just better understand self-employment tax, here is a step-by-step guide to the calculation. READ MORE
Step 1: Determine Your Self-employment Income
Self-employment tax is calculated on your net profit or loss for the year, which is calculated in various places on your tax return. Here are three places to find your net profit or loss, depending on your type of entity.
- Sole proprietor or single-member LLC: Line 31 of your Schedule C reports your net profit or loss, which is your self-employment income. Check out our Schedule C guide for help with completing this form.
- Partnership or LLC that files Form 1065: The Form 1065 return filed by the partnership includes a Schedule K-1 for each partner. Your self-employment income is provided on line 14 of Schedule K-1.
- Independent contractor or freelancer: Independent contractors and freelancers should receive Form 1099-MISC from the companies that pay them. While it is acceptable to use the Form 1099-MISC amount as your self-employment income, it is much better to show this amount as gross receipts on line 1 of Schedule C and then deduct any business expenses to arrive at self-employment income on line 31.
Self-employment tax is calculated separately for each individual. So, if a husband and wife each have a K-1 from a partnership or a schedule C, the following steps must be completed for each of them separately.
As an example, assume that in 2020, Mary has a net profit reported on schedule C from her small business of $60,000. Her husband also has a schedule C business with a net profit of $45,000. Mary’s self-employment income is $60,000 and is not affected by her husband’s earnings.
Step 2: Calculate Your Net Self-employment Income
Self-employed taxpayers are allowed to reduce their net self-employment income by 7.65%. You calculate your net self-employment income by multiplying your self-employment income by 92.35%, which is 1 – 7.65%:
So, Mary’s net self-employment income is:
Net self-employment income: $60,000 X 92.35% = $55,410
Step 3: Adjust Your Social Security Wage Base
The maximum amount of income subject to Social Security ($137,700 for 2020) provided in the earlier table is the maximum amount of combined wages and net self-employment income that is subject to Social Security tax. Subtract your wages from $137,700 (for 2020) to determine the maximum amount of net self-employment income subject to Social Security tax.
Assume that Mary, from our earlier example, has wages in 2020 from an unrelated employer of $100,000. Her adjusted Social Security wage base is:
Adjusted Social Security wage base: $137,700 – $100,000 = $37,700
Because Mary has already paid Social Security tax on $100,000 of wages, the maximum amount of her self-employment income subject to Social Security tax is $37,700. If Mary’s wages were greater than $137,700, then none of her self-employment income would be subject to Social Security tax.
Step 4: Calculate the Social Security Portion of the Self-employment Tax
The Social Security portion of your self-employment tax is 12.4% times the lesser of your:
- Net self-employment income (from step 2), or
- Adjusted Social Security wage base (from step 3)
Mary’s Social Security portion of her self-employment tax is based on her adjusted Social Security base from step 3 ($37,700) since it is less than her net self-employment income ($55,410) from step 2.
Social Security tax: $37,700 X 12.4% = $4,675
Step 5: Calculate the Medicare Portion of the Self-employment Tax
The Medicare portion of your self-employment tax is net self-employment income (from step 2) times 2.9%. If your total gross income on your return is over $200,000, you might owe an additional Medicare tax of 0.9% on excess wages and self-employment income, but that Medicare tax is not part of the self-employment tax.
Mary’s Medicare tax on self-employment income is:
Medicare tax: $55,410 X 2.9% = $1,607
Step 6: Calculate the Total Self-employment Tax
Total self-employment tax is the Social Security portion (step 4) plus the Medicare portion (step 5). Mary’s total self-employment tax is:
Self-employment tax: $4,675 + $1,607 = $6,282
When to Pay Self-employment Taxes
Self-employment taxes are generally due quarterly throughout the year along with any estimated income tax that is due. Rather than calculating your self-employment tax by hand as done above, I recommend QuickBooks Self-Employed (QBSE), which will not only track your income and expenses, but also calculate your self-employment tax throughout the year.
Due Dates for Estimated Tax Payments for 2020
Payment Due Date
Jan. 1-March 31
April 1-May 31
July 1-Aug. 31
Sept. 1-Dec. 31
Jan. 15, 2021
There is no form showing the tax calculation that is filed on a quarterly basis. You simply include your estimated self-employment tax along with any estimated income tax you owe and pay it to the IRS. You can make the payment using the Electronic Federal Tax Payment System (EFTPS) or mail a check along with Form 1040-V, which is simply a voucher with your name, Social Security number, and the amount of the payment.
How to Report Self-employment Tax
Business owners and partners use Schedule SE to compute and report self-employment taxes annually. A Schedule SE must be completed for each spouse who has self-employment income, and it must be attached to the individual return (Form 1040). Any quarterly payments of tax made during the year will offset the self-employment tax calculated on the annual return.
2 Ways to Reduce Self-employment Tax
There are two ways to reduce your self-employment tax. The first is straightforward: Reduce your self-employment by claiming all your available business deductions. The second is a little more complicated and requires some thought before taking action.
1. Business Deductions
The easiest way to reduce your self-employment tax is to dig hard to make sure you claim all the available business deductions to lower your self-employment income. These deductions will reduce your income tax as well as your self-employment tax.
Below is a list of the most common business deductions that you can take:
- Home office expenses: Deduct a percentage of rent, utilities, and office furniture
- Travel expenses: Deduct meals, transportation, and hotel costs
- Vehicle mileage deduction: Deduct miles driven for business
- Startup costs for new businesses: Includes permits, licenses, and legal fees
- Signage and advertising: Includes online and print ads, as well as signage outside your office
Check out our complete discussion on deductible business expenses for more examples.
2. Become an S Corporation
Changing your business to an S corporation (or an LLC taxed as an S corporation) will eliminate self-employment tax because S corporations do not pay self-employment tax on the income that flows through to the individual return. However, if you perform services for the S corporation, you will have to pay yourself a salary, which will be subject to payroll taxes just like any other employee.
If you own 100% of an S corporation (S-corp), you can think of your total S-corp income being separated into two components:
- Your salary (subject to Social Security and Medicare through payroll taxes)
- Flow-through income (not subject to Social Security and Medicare)
The lower the salary you pay yourself, the more flow-through income you have, and thus the less Social Security and Medicare tax you pay. The way you save taxes with an S corporation is to pay yourself as low of a salary as can be justified.
The IRS is very aware of this strategy and is constantly battling taxpayers over what is a “fair salary.” However, as long as the salary you receive is adequate for the work you perform, the IRS acknowledges this is a legitimate strategy.
In addition to self-employment taxes, a conversion to an S corporation can have dramatic income tax effects both at the time of the conversion and later down the road. Be sure to consult with a tax professional before making this decision.
Frequently Asked Questions (FAQ) About Self-employment Tax
What taxes do I pay as self-employed worker?
The two largest federal taxes paid by self-employed people are self-employment tax and income tax. Both of these taxes are calculated on the federal individual income tax returns (Form 1040).
Do I have to pay self-employment tax?
Any individual with over $400 in self-employment income must pay self-employment tax. Self-employment income is profit earned by small businesses not organized as corporations, and freelancers who are not paid as employees.
How do I pay self-employment tax?
Self-employment tax is paid either quarterly with Form 1040-V (along with any estimated income tax due) or annually with the federal individual income tax return, Form 1040. If you wait and pay the self-employment tax annually with the Form 1040, you might be subject to an underpayment penalty. Quarterly payments can also be made electronically through EFTIPS.
Minimizing your self-employment tax consists of two steps. First, you need to keep accurate track of your business income or loss to make sure you are claiming all the deductions available to you. Second, you need to accurately calculate your self-employment tax.
I recommend QuickBooks Self-Employed for both of these crucial tasks. It will import your banking activity to make sure no payments are missed. It will automatically calculate your self-employment tax and remind you when payments are due.