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
Year | Social Security Tax | Medicare Tax |
|---|---|---|
2019 | 12.4% on the first $132,900 of wages and self-employment (SE) income | 2.9% of wages and SE income |
2020 | 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.
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.
Filing Status | 0.9% Tax on Wages and SE Income in Excess of |
|---|---|
Married Filing Jointly | $250,000 |
Married Filing Separate | $125,000 |
Single or Head of Household | $200,000 |
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
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.
Visit QuickBooks Self-Employed
Due Dates for Estimated Tax Payments for 2020
Year | Income Earned | Payment Due Date |
|---|---|---|
2020 | Jan. 1-March 31 April 1-May 31 July 1-Aug. 31 Sept. 1-Dec. 31 | April 15 June 15 Sept 15 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.
Bottom Line
Now that you understand the calculation of your self-employment tax, you can be confident in the estimation of your quarterly tax payment. Because you don’t have an employer withholding the tax from your wages, you must be disciplined in making the required quarterly payment to avoid falling behind and suffering underpayment penalties.
Jesse Kimmel
Hi – I hope you are having a great day! I just wanted to may a minor correction to the note under “Self Employment Tax Rate Table. The numerator in the calculation is incorrect. It should be both medicare and social security not just social security.
Original:
This is because the IRS allows you to deduct half of your self employment tax (12.4% / 2 = 7.65%) when calculating your net earnings.
Corrected:
This is because the IRS allows you to deduct half of your self employment tax (15.3% / 2 = 7.65%) when calculating your net earnings.
Crystalynn Shelton
Thank you Jesse, we will be sure to make this correction.
Best-
Crystalynn
Tarva Ganois
Hello. I have a full time job and work as a newspaper carrier to supplement my income. The newspaper gives me a 1099 each year, what is the best way for me to lower my self-employment taxes? Thank you
Crystalynn Shelton
Hi Tarva,
Unfortunately you won’t be able to lower your self-employment taxes. Self-employment tax is a combination of social security and medicare taxes which are the same for everyone. However, if you have expenses that you pay for either your full-time job or your part-time newspaper gig that you don’t get reimbursed for those could help to lower your overall income tax bill. I recommend that you speak with a tax pro who can review your specific info and give you the best guidance. Check out our National Bookkeeper directory to see if you can find a local expert in your area.
Best of luck,
Crystalynn Shelton, CPA
Brittany
I run a tutoring business. I just started it. I will be making approximately 20k a year. I have some questions.
1. Will I have to file as a small business or as self employed? Which will get me the better tax rate?
2. If filing it said taxes were like 15% …so I would have to pay another 12% on top of that?
3. If your business is your only income and you file as single and you make 20k…will you get most of this back in a tax.return?
4. Do I have to file quarterly or can I do it at the end of the year?
Crystalynn Shelton
Hey Brittany!
Congratulations on your tutoring business! Below I have reposted your questions along with my response based on information that I am aware of. However, you should consider speaking with a tax expert who can look at your particular tax situation and provide specific guidance to you.
Question: Will I have to file as a small business or as self employed? Which will get me the better tax rate?
Answer: You can file as self-employed or you can choose to file as a sole proprietor. Filing as a sole proprietor will allow you to take deductions for any business expenses you incur so I recommend that you go that route. To learn more about the deductions you can take as a sole prop, check out our article on How to Complete Schedule C, I have provided the link below:
https://fitsmallbusiness.com/schedule-c-profit-and-loss-form-1040/
Question: If filing it said taxes were like 15% …so I would have to pay another 12% on top of that?
Answer: Self-employment tax can be anywhere between 15.3%-16.2%. Remember that it is only on 92.35% of your income, not the whole thing.
Question: If your business is your only income and you file as single and you make 20k…will you get most of this back in a tax.return?
Answer: Your tax liability is based on a number of factors, including the deductions you are eligible for, your exemptions as well as any eligible business expenses you take as a tax deduction. You would have to use a tax software like TurboTax to see what your tax liability would be.
Question: Do I have to file quarterly or can I do it at the end of the year?
Answer: Yes, you must file self-employment tax on a quarterly basis. If you don’t, a penalty will be assessed on your tax return if you do not file & pay quarterly.
Best-
Crystalynn Shelton, CPA
@CrystalynnPens
Crystal
Hello Crystalynn,
Why is only 93.25% of the income taxable verse 100%? Also is the 93.25% still applicable for tax estimates for 2018 and is this only at the federal level or is it state and local as well?
Thank you
Crystalynn Shelton
Hi Crystal, great questions! In all honesty I have no idea why we only pay taxes on 92.35% instead of 100%. However, maybe one of our other readers that is a tax expert can chime in here. As far as your question regarding whether or not this rate is applicable for estimated taxes, the answer is yes. On line 4 of Form SE it says to multiply by the 92.35% rate. This is a federal form so it is not applicable to states. However, the rules do vary by state so I recommend that you find out what the rules are for your state.
Best of luck,
Crystalynn Shelton, CPA
Ruby Lopez
“Why is only 93.25% of the income taxable verse 100%? Also is the 93.25% still applicable for tax estimates for 2018 and is this only at the federal level or is it state and local as well?”
Hello, You may find the answer in this article below:
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, if you are self-employed, you are responsible for contributing both portions.
For the 2017 and 2018 tax year, the combined tax rate for Social Security and Medicare is 7.65 percent (Social Security is 6.2 percent and Medicare is 1.45 percent) for an employee and double (15.3 percent) for the self-employed. However, the maximum taxable earnings for Social Security is $127,200 ($128,400 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 and 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 $500,000 ($1 million for 2018) in Equipment/Furniture purchases (Section 179 deduction)
Tax return preparation fee
George
My son made less than $4000. For a summer internship while in college, The income was reported on a 199-misc. Does he have to pay self-employment tax?
Laura Handrick
Hi George,
Since you son is a college intern, not a business, and his annual income is only $4,000 he will need to report the income on a 1040 (not a 1040EZ). No need for him to file a business tax return.
Here is a link to the tax tables with instructions: https://www.irs.gov/pub/irs-pdf/i1040tt.pdf
Here is a link to the 1040 form: https://www.irs.gov/pub/irs-pdf/i1040gi.pdf
As we cannot provide specific tax advice, we recommend he use a tax preparer, or file taxes online using a free service like TurboTax.
Best wishes!
Laura, HR Writer
JK
hello Ms. Shelton,
My name is JK. I am helping my friend. His revenue for 2017 is 70K and loss is $5K. how much Social Security and Medicare he should pay? will it be 15.3%
Thanks so much
Crystalynn Shelton
Hi JK, unfortunately I cannot give any kind of tax advice. I recommend that you locate a tax pro or purchase a tax software like TurboTax that will do all of the calculations for you.
All the Best-
Crystalynn Shelton