Self-Employment Tax: What It Is, How to Calculate It - NerdWallet (2024)

FAQs

How do I calculate my self-employment tax? ›

The self-employment tax rate is 15.3% of net earnings in 2024. That rate is the sum of a 12.4% Social Security tax (also known as OASDI tax) and a 2.9% Medicare tax on net earnings. Self-employment tax is not the same as income tax.

Overview. A self-employed individual may deduct 50 percent of his or her self-employment tax liability for the tax year. The deduction is claimed as an above-the-line-deduction is computing adjusted gross income (AGI). The taxpayer does not need to itemize deductions to claim the deduction.

1099 contractors should set aside 20-35% of their income to pay taxes. However, it's best to consult with an accountant as each case is unique.

Simply being self-employed subjects one to a separate 15.3% tax covering Social Security and Medicare. While W-2 employees “split” this rate with their employers, the IRS views an entrepreneur as both the employee and the employer. Thus, the higher tax rate.

Qualified business income deduction: Do you qualify? The QBI deduction is for you if you're a small-business owner, or self-employed, allowing you to deduct up to 20% of your QBI from your taxes. This includes people who have “pass-through” income, which is business income that you report on a personal tax return.

Social Security tax formula: Employee Income × 6.2% = Social Security Tax. Medicare tax formula: Employee Income × 1.45% = Medicare Tax. FUTA tax formula: Employee Income × (FUTA Tax Rate – State Credit Reduction) = FUTA Tax. SUTA tax formula: Employee Income × State SUTA Tax Rate = SUTA Tax.

Self-employment tax deduction

The IRS lets you deduct half of the 15.3 percent self-employment tax (which covers social security and medicare taxes), so 7.65 percent—the same amount you would deduct if you were an employer. Plus, you'll lower your taxable profit with the more deductions you're able to claim.

To get the biggest tax refund possible as a self-employed (or even a partly self-employed) individual, take advantage of all the deductions you have available to you. You need to pay self-employment tax to cover the portion of Social Security and Medicare taxes normally paid for by a wage or salaried worker's employer.

The self-employment tax rate is 15.3%, with 12.4% for Social Security and 2.9% for Medicare. However, the Social Security portion may only apply to a part of your business income. That's because of the Social Security wage base. For 2022, the Social Security wage base is $147,000 and increases to $160,200 in 2023.

You can accomplish this by seeking to maximize tax write-offs through your business. Maximizing write-offs directly reduces the income subject to self-employment tax. As a self-employed individual, the tax law allows you write-off all ordinary and necessary expenses to conduct your trade or business.

How do I get the most out of my self-employed tax return? ›

By taking a business deduction instead of an itemized deduction, you reduce your adjusted gross income (AGI) and your self-employment tax. Whenever possible, it's best to deduct an expense or a portion of an expense as a business expense rather than an itemized deduction, as this generally increases your tax savings.

Self-employed income is calculated by adding up all the income recorded on your 1099 forms. This includes 1099-NEC, 1099-MISC and 1099-K forms. The total earned income is then subject to the independent contractor tax rate of 15.3%.

Generally, the amount subject to self-employment tax is 92.35% of your net earnings from self-employment. You calculate net earnings by subtracting ordinary and necessary trade or business expenses from the gross income you derived from your trade or business.

It is, thus, up to the independent contractor to calculate and pay the taxes they owe from the untaxed earnings to the IRS. A general rule of thumb is to set aside 30-35% of your income for your taxes.

You're allowed to deduct 50% of what you pay in self-employment tax as an income tax deduction on Form 1040. This deduction is available whether or not you itemize deductions.

Nevertheless, independent contractors are usually responsible for paying the Self-Employment Tax and income tax. With that in mind, it's best practice to save about 25–30% of your self-employed income to pay for taxes. And, remember, the more deductions you find, the less you'll have to pay.

The SE tax rate is 15.3% with 12.4%for Social Security and 2.9%for Medicare. We report your SE tax on Schedule SE and also calculate the deduction that goes along with it.

The tax carries to the end of your tax return, after your regular tax is calculated. The standard deduction or itemized deductions, nonrefundable tax credits, and exemptions reduce any regular income tax you might pay. They don't impact the SE tax. Only business expenses on the Schedule C can reduce your SE tax.