What is Self-Employment Tax?

In our previous blog post, Employment Tax: What is it?, we covered what Employment Tax is and what the different kinds are, like FICA, FUTA, Unemployment Insurance, Payroll Taxes, etc. We also covered the minor differences between Employment Tax and Payroll Taxes, so if you’re looking for more information about Employment Tax basics, check it out. In this post, we’ll be discussing what Self-Employment Tax is, and what the main differences are between Self-Employment Tax and Employment Tax.

Self-Employment Tax

Self-Employment Tax, also known as Self Employed Contributions Act (SECA) taxes, are the taxes that self-employed people, like freelancers, independent contractors and sole proprietors, are required to pay to the Internal Revenue Service (IRS). Self Employment Tax consists of Social Security and Medicare taxes. These taxes are essentially equivalent to the Employment Taxes employers are required to pay as part of the Federal Insurance Contribution Act (FICA).

One advantage of Self-Employment taxes, according to the IRS, is that “you can deduct the employer-equivalent portion of your SE tax in figuring your adjusted gross income,” whereas “wage earners cannot deduct Social Security and Medicare taxes.” So while these taxes are unavoidable for all, at least they’re deductible for those that are self-employed.

What is the Self-Employment Tax rate?

The Self-Employment Tax rate, which consists of Social Security and Medicare taxes, is 15.3%. This breaks down into 12.4% for social security and 2.9% for Medicare.

In general, as mentioned before, sole proprietors, independent contractors, freelancers, and, depending on the state, single-member Limited Liability Corporations (LLCs), are required to pay Self-Employment Taxes. If you’re wondering if you’re required to pay Self-Employment Taxes, here are the stipulations according to the IRS (as of 10/18/2020):

• Your net earnings from self-employment (excluding church employee income) were $400 or more.
• You had church employee income of $108.28 or more.

Self-Employment Tax Recommendations

If you’re self-employed as an independent contractor or freelancer, or even as a sole proprietor or single-member LLC in certain states, you’ll want to think ahead and play it smart when it comes to your self-employment taxes. As we mentioned in our previous article, Employment Tax: What is it?, an employer typically withholds and matches the Medicare and Social Security taxes, so in a situation where you are self-employed, you will be responsible for all of these taxes, which is the 15.3% we mentioned earlier. So set some aside every month for your taxes and play it safe! In some states, you may be required to file quarterly, but in general, many states allow you to file your taxes once a year. Just be prepared!

Self-Employment Tax Summary

• The Self-Employment Tax rate is 15.3%.

• You will be required to pay self employment taxes if your net earnings from self-employment (excluding church employee income) were $400 or more OR you had church employee income of $108.28 or more.

Employment Tax Issue Relief

In our next post, Employment Tax: Issues and Relief, we’ll discuss some of the options available to help with employment tax issues and self-employment tax issues.