Self-employment tax: What to know and how to calculate it

Self-employed tax rates are a bit higher than rates employees pay, because self-employed workers' payments combine both employee and employer contributions. Self-employed workers also pay a rate that combines Medicare and Social Security taxes. This is because employees have Medicare taxes and Social Security taxes withheld from their paycheck by their employer, while self-employed workers need to be responsible for these taxes themselves.

Self-employed individuals may also owe the Additional Medicare Tax if their total wages and net earnings from self-employment exceed $200,000 for single filers or $250,000 for those married filing jointly.

Who must pay self-employment tax?

The IRS lists two groups that must pay self-employment tax:

• Anyone with net earnings from self-employment of $400 or more.
• Church employees with an income of $108.28 or more.

You need to have either a Social Security Number or Individual Taxpayer Identification Number to pay self-employment tax. To obtain an Individual Taxpayer Identification Number file Form W-7, Application for IRS Individual Taxpayer Identification Number.

How to calculate the self-employment tax

Social Security taxes must be paid on your first $160,200 of Social Security taxable wages in the 2023 tax year. This includes earnings from a W-2 job, as well as net earnings from self-employment.

Calculating your self-employment tax involves several steps:

• Add all net profit from your self-employment activities
• Multiply this amount by 0.9235 to account for the self-employment tax deduction
• Subtract your wages from W-2 jobs from the annual wage limit. Then, compare the number you calculated for the self-employment tax deduction to this number. You pay the Social Security tax on the lower of these two numbers
• Next, combine the tax amounts for Social Security and Medicare to determine the total self-employment tax owed

Use Schedule SE, Self-Employment Tax, for explicit details that apply to all possible situations. The Additional Medicare Tax amount is calculated on Form 8959, Additional Medicare Tax. These forms and schedules are part of the Form 1040 package of forms provided by the IRS.

How to pay self-employment tax

You typically make self-employment tax payments with your quarterly estimated tax payments if the following circumstances apply:

• You expect to owe $1,000 or more when you file your tax return
• You expect your withholding and refundable credits to be less than the smaller of:
  • 90% of the tax shown on your current year tax return
  • 100% of the tax shown on your previous year tax return as long as the tax return covers a full 12-month period

You make quarterly estimated tax payments using Form 1040-ES. This is a general rule of thumb and specific situations may require other actions. People who expect to owe less than $1,000 may pay their self-employment taxes owed when they file their income tax returns.