What is the Self-Employment Tax?

Self-Employment Tax Rate

The Self-employment tax has two components – Social Security Tax & the Medicare Tax. The basic tax structure is 12.4% for Social Security Tax & 2.9% for Medicare Tax, making it a total of 12.4+2.9= 15.3%

The Social Security tax also has two components – The employer pays social security tax of 6.2% & the employee pays social security tax of 6.2%. Thus, the self-employed person is required to pay for both rates. This makes the total social security tax rate 12.4%.

The breakup of the self-employment tax is available with the following table:

However, not the whole of net earnings is liable for the 15.3% self-employment tax rate. The first $ 137,700 is liable for social security tax only. Amount beyond $ 137,700 is liable for both social security tax as well as Medicare tax.

However, you are required to pay 0.90% for Additional Medicare in case the total earnings exceed $200,000 (in case of single filer) or exceed $250,000 (in case of joint filer).

In case additional Medicare tax is considered, the total Medicare tax becomes 2.9 + 0.9 = 3.8% in some instances. In that the employment tax reaches 15.30+0.90= 16.20%

How to Calculate Self-Employment tax?

Example #1

Solution:

Example #2

The TaxpayerTaxpayerA taxpayer is a person or a corporation who has to pay tax to the government based on their income, and in the technical sense, they are liable for, or subject to or obligated to pay tax to the government based on the country’s tax laws.read more has provided the following details:

Deduction of Self-Employment Tax

The IRS has logically framed the self-employment taxation system by allowing the business-related expenses to be deducted from the earnings. The tax deductions have been specified as follows:

  • Deduction for home officeDeduction for health insurance premiumsMealsTravelInterest expenseInterest ExpenseInterest expense is the amount of interest payable on any borrowings, such as loans, bonds, or other lines of credit, and the costs associated with it are shown on the income statement as interest expense.read moreBusiness InsuranceStart-up costsRetirement Plan contributionsRental costEducationAdvertisingVehicle use

How to Pay Self-Employment Tax?

If you are sure to earn more than $ 400 a year, you should apply for a social security number (SSN) or taxpayer-identification number or an employer identification number. These numbers help the federal government to identify you easily. Then, you would require the following forms.

  • Form 1040-SR to quantify the benefits under social security programs.Form 1040 (Schedule SE) to report your self-employed earnings.Form 1040 (Schedule C) to report the net income or lossForm 8959 to determine the liability for Additional Medicare TaxForm 1040-ES to pay for the estimated taxEstimated TaxEstimated Tax is the approximately calculated tax to be paid by an earning individual eligible to pay taxes over their income. This amount is projected annually based on the net income earned by the individual after all deductions as per the income tax act prevalent in a particular State for that fiscal year.read moreThe payment for the taxes can be made through any of the available methods:The most convenient & reliable method “IRS2Go Mobile Application.”Online payment through the websiteWire transfer through a bank accountThe EFTPS (i.e. Electronic Federal Tax Payments System)Through cash with some additional feeThrough check with your details such as name, tax identification number & the year for which tax is being paid.

Benefits

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  • Self-employment tax shows the sensitivity of the person towards the society.It builds the nation with a higher quality of infrastructure.The government can fund the expenses of a needy person through such a collection.The tax rate is also the average and nominal.Computations are easy for a layman with no ambiguities.The individual is helping to build the nation.

Drawbacks

  • Disposable incomeDisposable IncomeDisposable income is an important mechanism to measure household incomes, and includes all sorts of income such as wages and salaries, retirement income, investment gains. In other words, it is the amount of money left after paying off all the direct taxes.read more of the individual decreases.

  • Risk of fraud of public money by the politicians.The tax is a cost for the tax paper. It should have been as per the slab rate system to be more beneficial.Currently, the tax considers every earner on equal grounds which may be correct to assume.

This has been a guide to self-employment tax and its definition. Here we discuss examples, rates, who should pay and how to calculate self-employment tax along with its deduction and benefits. You may learn more about financing from the following articles –

  • Federal Income TaxFuta TaxSurtaxConsumption Tax