Are you self-employed? Then you better read on. People who are self-employed must pay a unique payroll tax called self-employment tax.
Who pays self-employment tax?
It’s not uncommon for self-employed individuals to wonder – do I have to pay self-employment tax? Anyone who is self-employed must pay self-employment tax. You are considered self-employed if you are a sole proprietor, an independent contractor, or a member of a partnership.
If you are self-employed, you have to pay self-employment tax if you make more than $400 in one year.
You must pay self-employment tax no matter your age, even if you already receive Social Security or Medicare.
How much is self-employment tax?
Self-employment tax is 15.3% on the first $128,400 you earn in 2018. If you earn even more, the rate is 2.9% on income earned beyond $128,400. The rates change annually.
Self-employment tax is similar to the Social Security and Medicare taxes that employees and employers pay. With employees, 6.2% is withheld from their wages for Social Security tax and 1.45% is withheld for Medicare tax. Employers pay matching amounts for Social Security and Medicare taxes. With self-employment tax, you essentially pay both the employee and employer portions of Social Security and Medicare taxes.
Here’s a breakdown of self-employment tax:
- 6.2% employee portion + 6.2% employer portion = 12.4% Social Security tax paid by self-employed
- 1.45% employee portion + 1.45% employer portion = 2.9% Medicare tax paid by the self-employed
- 12.4% + 2.9% = 15.3% total self-employment tax
How do you pay self-employment tax?
To pay self-employment tax, you must first have a Social Security number (SSN) or an Individual Taxpayer Identification Number (ITIN).
You will make estimated quarterly payments to pay self-employment tax. Use Form 1040-ES, Estimated Tax for Individuals. You should make quarterly payments because you do not have an employer who regularly withholds the taxes for you. Form 1040-ES will help you determine how much estimated tax to remit. You should also use your tax return from the previous year to help you estimate your annual income.
Estimated self-employment tax is due April 15 for the first quarter, June 15 for the second quarter, Sept. 15 for the third quarter, and Jan. 15 for the fourth quarter.
You might receive a penalty if you do not pay enough self-employment tax during the year. In some cases, you might receive a penalty if you pay too much estimated tax.
You can pay your estimated self-employment tax online, by phone, or by mail. You can get more information on making your payments in Form 1040-ES.
When you file your annual tax return, you will need to submit Schedule C (Form 1040). You will use Schedule C to report your profits and losses for the year.
Other things to consider
Self-employment tax only pays for Social Security and Medicare taxes. Self-employment tax does not cover any other payroll taxes. You still need to pay federal, state, and local income taxes.
Also, you can deduct the employer-equivalent part of self-employment tax as a business expense on your income tax return. The deduction only affects your adjusted gross income and your income taxes. You must still pay the whole self-employment tax.
When you are self-employed, you face unique challenges. You can conquer those challenges as long as you stay on top of them. It is important to keep up with your self-employment tax obligations. While you don’t have an employer to answer to, you still have to answer to the IRS.
Payroll taxes can be complicated. That’s why Patriot offers Full-Service Payroll Software. We make payroll easy by filing and remitting payroll taxes on your behalf. Start a free trial today!
Original publication date was 8/13/2014.