As a self employed person, you have to pay both the employer and employee portion of your Social Security and Medicare taxes, known as “self employment taxes.” If you make $400 or more in self employment income, you will pay between 15.3%-16.2% in self employment tax on up to 92.35% of your income.
You can use Schedule SE to calculate and report your quarterly self employment taxes.
However, If you do your own taxes and are worried about your self employment income, try QuickBooks Self-Employed. With QuickBooks, you can separate business and personal income and expenses, automatically calculate quarterly estimated taxes and pay taxes online. Get started with up to 50% off QuickBooks.
Self Employment Tax Rate Table
|Self Employment Taxes||Tax Rates|
|Social Security Tax||12.4% up to a maximum wage of $127,200|
|Medicare Tax||2.9% - 3.8% with no wage cap|
*Note: self employment taxes are paid on 92.35% of self employment income
Who Has to Pay Self Employment Tax
If you had net earnings of $400 or more in self employment income then you must pay self employment tax. Self employment tax is due four times a year on the 15th of April, June, September and January (of the following year). See our due dates table for additional details.
The following entities typically earn self employment income and are subject to self employment tax:
- Sole proprietors
- Partners in a partnership
- Members of an LLC
- Independent contractors such as Lyft/Uber drivers who received a 1099-MISC form
If you are an S-corp you will have to pay self employment taxes. However, If you own a Corporation, you may or may not have to pay self employment tax. Check out our how to determine if the owner of a C-corp or S-corp has to pay self employment taxes section to learn more.
If you need to get your self-employment taxes filed, try TurboTax, our recommended tax software for small businesses. 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.
How to Calculate Self Employment Taxes
When you are a W2 employee, you are subject to 6.2% of social security taxes (up to $127,200 for the 2017 tax year) and 1.45% of Medicare taxes. This is a combined total of 7.65%. However, self employed people must pay double social security and Medicare taxes since they are required to pay both the employee and the employer portion of these FICA taxes.
Therefore, your “self employment taxes” consist of 12.4% in Social Security taxes (up to $127,200 for the 2017 tax year) and 2.9% in Medicare taxes (with no income limit). This is a combined total of 15.3%. However, Depending on your earnings and tax filing status, you may be subject to an additional Medicare tax of 0.9%; refer to our self employment tax rate table for more info.
To determine how much self employment taxes you actually owe, you will need to first know your business’s total net profit or net loss for the tax year. As a business owner, there are a few ways to get this figure:
- If you are a Sole Proprietor or single-member LLC, then complete your Schedule C first. The Net Profit (Loss) figure from Line 31 is your self employment income (loss). Check out our Schedule C guide for help with completing this form.
- If you are a Partnership or multi-member LLC that files Form 1065, then refer to your Schedule K-1 for the Net Profit (Loss) figure. This is your self employment income (loss). For help completing this form, check out our guide on Form 1065.
- If you are an Independent contractor, refer to your 1099-MISC form for the Net Profit(Loss) figure. This is your self employment income (loss). Check out our article on Form 1099 reporting for more information.
If you use an accounting program like QuickBooks, simply run your profit and loss report for the tax year (i.e. January 1-December 31). The bottom line Net Profit (Loss) is your self employment income (loss). Once you have your self employment income, use the following table to determine your 1099 tax rate.
It is important for you to know that only 92.35% of your self employment income is subject to self employment taxes (not including the wage cap of $127,200 on Social Security taxes for the 2017 tax year). This is because the IRS allows you to deduct half of your self employment tax when calculating your net earnings.
Self Employment Tax Rates for 2017 & 2018 Tax Years
|Under $400||No self employment tax due|
Married joint filers
Married filing separate
|12.4% - up to a maximum wage of $127,200 (2017) and $128,700 (2018)||Combined 1099 tax rate of 15.3%
Pay 1099 taxes on 92.35% of your income
|Above $200K: |
Married joint filers
Married filing separate
|12.4% up to a maximum wage of $127,200 (2017) and $128,700 (2018)||Combined 1099 tax rate of 16.2%
Pay 1099 taxes on 92.35% of your income
NOTE: if you file a joint return with your spouse, be sure to combine your spouse’s income with your own to determine your self employment income and tax rate.
Let’s look at a couple of examples of how you would calculate the amount of self employment taxes owed:
Example 1: Let’s say that you own a restaurant and the net earnings for 2017 were $100,000. To figure out your taxable self employment income, multiply this amount by 92.35 %, which equals $92,350. Then, apply the 15.3% tax rate to this amount. This shows that you owe $14,130 in self employment taxes.
Example 2: Let’s say you own a booming plumbing business, and the net earnings for 2017 were $150,000. Multiplying this by 92.35 % tells you the taxable self employment income, which is $138,525. Only $127,200, however, is subject to Social Security tax, so your Social Security tax is $127,200*12.4% = $15,773.
The Medicare portion of the tax applies to the full $138,525, so your Medicare taxes are equal to 138,525*3.8% = $5,264. When you add up the Social Security and Medicare taxes, you’ll see that you owe a grand total of $21,037 in self employment taxes.
To make calculating self-employment taxes simple, check out QuickBooks Self-Employed. QuickBooks will automatically estimate your quarterly taxes for you and export your Schedule C to TurboTax so you can pay your taxes online. Get started today with up to 50% off.
How to Report Self Employment Tax
Business owners must use Schedule SE to compute and report self employment taxes. There are two types of Schedule SE’s; a short version and a long version. Use the diagram below to determine which self employment form you must complete:
If you were subject to the 16.2% self employment rate then you must also file Form 8959 to report the additional Medicare tax paid. This form along with Schedule SE must be filed with Form 1040.
When to Pay Self Employment Taxes
If you were taken by surprise with a sizable tax bill this year, you might want to consider making quarterly payments throughout the year. You can use IRS Form 1040 ES to estimate your quarterly payments. If you use TurboTax software, it will calculate your quarterly tax payments and complete all of the necessary forms for you.
Keep in mind that if you underpay your taxes by more than $1,000, the IRS may charge a penalty when you file your tax return. The amount of the penalty depends on a number of factors such as whether or not you were late with more than one payment as well as the number of days the payment was made after it was due. There are two methods for calculating the penalty, and the IRS Pub 505 provides step by step instructions on how to calculate the penalty for both methods.
In the table below are the estimated due dates for each pay period. As long as your payment is postmarked by the payment due date, it will be considered on time by the IRS.
Due Dates for Estimated Self Employment Tax Payments
|Pay Period||Payment Due Date|
|Jan 1 - Mar 31||15-Apr|
|Apr 1 - May 31||15-Jun|
|Jun 1 - Aug 31||15-Sep|
|Sept 1 - Dec 31||January 15 of the following year|
The IRS offers a variety of ways to make tax payments. I recommend using the Electronic Federal Tax Payment System (EFTPS). This is a free tool offered by the Department of Treasury, and you can use it to schedule payments in advance so that you don’t forget.
According to the EFTPS website, it can take up to 7 business days to receive your PIN, which is required for you to log in and make payments. Make sure you apply well in advance of any deadlines. Click here for information on other payment options that are available.
Two Ways to Reduce Your Self Employment Tax
Two ways you can reduce your self employment tax without getting the attention of the IRS are to take more business deductions and change your business structure to an S-corp or an LLC taxed as an S-corp. Let’s take a look at each one in a little more depth.
1. Business Deductions
If you take advantage of all of the deductions available to you, then you can reduce your taxable income, which will therefore reduce your income tax liability and self employment tax liability. Below is a list of the most common business deductions that you can take:
- Home office expenses
- Travel and entertainment expenses
- Vehicle mileage deduction
- Startup costs for brand new businesses
Be sure to keep good records just in case you ever have to prove to the IRS these were legitimate business expenses. To learn more about tax savings that you may be missing out on, read our Business Tax Saving Tips article.
2. Business Structure
If you decide to change your business structure to an S-corp or an LLC taxed as an S-corp, this could reduce the amount of self employment tax that you pay because corporations have more allowable deductions, and you could pay yourself a salary so that you only pay half of your social security and Medicare tax and the corporation pays the other half.
However, there are several requirements that must be met to qualify as an S-corp. Be sure to consult with a tax professional to determine if changing your business structure makes sense for your business.
Self Employment Taxes for Corporations
There are two types of corporations, S-corporation (S-corp) and C-corporation (C-corp). Both types of corporations protect shareholders from being sued so that they are not at risk of losing their personal assets if a lawsuit is filed against the business.
For tax purposes, an S-corp is not taxed, so all business income and expenses are passed down to the shareholders and reported on Schedule K-1. Therefore, the owner of an S-corp would have to include any income reported on Schedule K-1 as Net Self Employment income on Schedule SE to calculate self employment tax. To learn more about what taxes an S-corp is subject to check out our S-corp tax guide.
A C-corp is considered a separate legal entity for tax purposes. If you’re the owner of a C-corp, you can be taxed twice, once as a corporate entity and then again on any distributions paid to you in the form of dividends. You are required to pay income tax on any distributions that you receive from the business. However, this income is not subject to Self-Employment tax.
As the owner of a C-corp, you are subject to self employment tax if you receive compensation that is not reduced by social security and Medicare taxes. In this case, the corporation would issue a 1099-MISC form to you, and you would have to report that income as self employment income on Schedule SE. In general, most owners of a C-corp receive a salary like regular employees so they don’t pay self employment taxes.
State & Local Tax Obligations
In this article, we have primarily focused on your tax responsibility at the Federal level. Federal law controls self employment taxes because social security and Medicare are mandated at the federal level. However, states and localities may have additional or different income tax laws. To learn more about your tax responsibility at the state level, check your state tax agency website.
Frequently Asked Questions (FAQ) About Self Employment Tax
What Are Social Security and Medicare Tax Rates?
Social Security and Medicare taxes combined are called “self employment tax”. For wage earners, this tax is shared 50/50 with an employer. However, for self employed you are responsible for contributing both portions.
For the 2017 tax year, the combined tax rate for social security and Medicare is 7.65% (social security is 6.2% and Medicare is 1.45%) for an employee and double (15.3%) for self employed. However, the maximum taxable earnings for social security is $127,200 ($128,700 for 2018 tax year). This means that once you reach $127,200 in taxable earnings for the year you no longer have to pay social security taxes for the remainder of the year.
What Is The Difference Between Self Employment Taxes vs. Income Taxes?
A self-employed person pays income tax based on the business earnings and the personal income tax tables provided by the IRS. Self employment taxes cover social security and Medicare contributions that are not withheld from a paycheck throughout the year (like they are for a wage earner).
What Tax Deductions Can Self Employed People Take?
Self-employed people are in business for themselves which makes them eligible to take the same deductions as most small business owners. We have discussed a few of these deductions, but here are a few more:
- Meals and Entertainment
- Up to $500K in Equipment/Furniture purchases (Section 179 deduction)
- Tax return preparation fee
Where Can I Find Instructions On How To Complete Schedule SE?
You can find step by step instructions for Schedule SE here.
Bottom Line – Self Employment Tax Rates
Unfortunately, as long as you are in business for yourself, there is no way around paying self employment tax. The good news is that you can reduce those taxes by taking all of the tax deductions you are allowed and selecting the right business structure like we discussed.
Take some of the stress out of filing your taxes by using QuickBooks Self-Employed. QuickBooks will track your income, expenses, and automatically calculate your taxes for you. Sign up for QuickBooks Self-Employed and get 50% off.