Self-employment tax is a tax consisting of Social Security and Medicare taxes primarily for those who work for themselves. It is similar to the Social Security and Medicare taxes taken from the wages of most wage earners.
Most wage earners have their Social Security and Medicare taxes calculated by their employers. Schedule SE, Self-Employment Tax, however, is used to compute self-employment tax (SE tax). The employer-equivalent part of your SE tax can also be subtracted from your adjusted gross income. Medicare and Social Security taxes cannot be deducted by wage workers.
The current self-employment tax rate is 15.3%, which includes social security (old-age, survivors, and disability insurance) at 12.4% and Medicare (hospital insurance) at 2.9%.The IRS Form 1040 Schedule SE is used to calculate and report the tax. People who earn less than these amounts via self-employment are exempt from paying taxes.
Key Takeaways
- People who make money but do not pay withholding taxes through their employers are subject to self-employment tax.
- Self-employment taxes are reported on IRS Form 1040 and are used to pay for Social Security and Medicare.
- Self-employed workers include independent contractors, freelancers, and sole owners who operate a business or trade.
- Self-employed people who make less than $400 annually (or less than $108.28 from a church) are not required to pay self-employment tax.
How the Self-Employment Tax Operates
Earning employees who do not pay withholding taxes through their employers are subject to self-employment tax. This covers individuals who operate a trade or business as independent contractors, freelancers, and sole proprietors. A partnership member who engages in a trade or business may also be regarded as self-employed.
Self-employment tax must be paid by self-employed people for them to be eligible for Social Security payments when they retire.
Medicare and Social Security are the two main social welfare programs that are funded by taxes paid by both the employer and the employee in any firm. Self-employed people are required to pay both parts of this tax because, in the IRS’s view, they are both the employer and the employee.
Self-Employment Tax Rates
The Social Security tax for self-employed people is 12.4% of their income, which is divided equally between the employee’s and employer’s usual shares of 6.2% each.
Furthermore, there is no upper limit on the amount of income that is subject to the 2.9% Medicare tax, which is split evenly between the employer’s and employee’s payments (1.45% each).
Therefore, 15.3% (12.4% + 2.9%) is the overall self-employment tax rate.