What Are Self-Employment Taxes?

Leaving steady employment to strike out on your own—whether as a freelancer, contractor, or solo entrepreneur—is one of the most exciting career changes you can make. You have the opportunity to build up your brand and develop a business based on your values and preferences. 

As exciting as self-employment can be, there are a lot of hurdles and learning, too. Unfortunately, you don’t have an HR department to handle your questions about health insurance, retirement savings, and taxes. You’ll need to answer these and other questions by yourself. 

Fortunately, there are valuable resources to help. Keep reading to learn more about self-employment tax to make sure you pay enough—without overpaying the IRS. 

What Is Self-Employment Tax?

When you worked as a traditional wage earner at a company, your employer calculated how much needed to be withdrawn from your paycheck for Social Security and Medicare and likely withdrew it automatically with each paycheck.

You paid half of the expected taxes and your employer paid the second half. However, as a self-employed individual, you need to figure out how much to pull from your account. 

Self-employment tax covers the cost of Social Security and Medicare as both the employee and the employer because you don’t have an employer to cover the second half of the tax. However, the IRS states that you can then deduct half of the self-employment tax (the would-be employer side) from your gross income when you file. So, if you need to pay $5,000 in self-employment tax at the end of the year, you can deduct $2,500 from your taxes.  

Who Pays Self-Employment Tax?

The main tax form that you’ll use when filing self-employment taxes is Schedule SE (Form 1040 or 1040-SR). You’ll need to pay self-employment tax if you make $400 or more on your work. 

Self-employment tax at the $400 rate excludes church employee income, however. If you have church employee income greater than $109, then you’ll have to pay self-employment tax on it. 

Self-employment taxes apply to workers of all ages—you need to pay them even if you’re currently receiving Social Security or Medicare benefits.  

What Is the Self-Employment Tax Rate?

The standard tax rates for Medicare and Social Security change from year to year. The 2021 rates are 15.30% for the self-employed. This accounts for 12.4% for Social Security and 2.9% for Medicare. Keep in mind that you can deduct half on your taxes, which means that you’ll pay the standard employee rate of 7.65% after deductions. 

There are certain income thresholds that change how much you need to pay, so these rates aren’t guaranteed as your business starts to take off. For example, the 12.4% Social Security rate covers up to $142,800 in wages. You’ll need to pay an additional 0.9% in Medicare taxes if you earn over $200,000 when filing as a single individual or $250,000 when married and filing jointly.  

As your income grows, you may want to meet with an accountant to make sure you’re paying the correct amount—this way, you won’t get a surprise bill when you file. 

When Do You Pay Self-Employment Tax? 

A common challenge to entering self-employment: you can’t rely on a company to cover your taxes for you. With Social Security and Medicare, employers automatically pull what you owe from your check and submit it for you to the IRS. 

An option for self-employed workers is to pay quarterly estimated taxes. Four times each year, you’ll pay what you estimate you owe to the IRS based on your income levels. You’ll then be asked to record what you paid to the IRS when you file your taxes fully in the spring. 

Paying quarterly estimated taxes can help you to avoid a large tax bill in the new year. You won’t have to worry about saving money to pay your taxes because you’ve already covered them throughout the previous year.   

How Do You Pay Self-Employment Tax?

The IRS has a portal for individuals who need to pay their quarterly estimated taxes. You can write a check, pay online, or even pay by credit card (though some cards have higher fees than others). For many self-employed individuals, this is the easiest way to pay your Social Security and Medicare taxes. 

When you file your taxes at the start of the new year, save your confirmation numbers and the amount you paid from these quarterly tax payments. This will make it easier to remember what you paid and when, ensuring that your taxes are accurate. 

Start Your Self-Employment Strong

The best way to estimate your self-employment taxes accurately is to track your income carefully. At Lendio, we make it easy to manage invoices and monitor your cash flow. Plus, our service is free for small business owners and solo entrepreneurs to use. Try out our tool today and see if it works for you.

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The information provided in this post does not, and is not intended to, constitute tax advice; instead, all information, content, and materials available in this post are for general informational purposes only. Readers of this post should contact their tax professional to obtain advice with respect to any particular tax matter.