Understanding your tax obligations in self-employment is crucial for maintaining financial health and compliance with the law. One key aspect of taxation that self-employed individuals need to grasp is the self-employment tax. In this comprehensive guide, we’ll delve into self-employment tax, how it’s calculated, and what you need to know to stay on top of your tax responsibilities.

What is Self-Employment Tax?

Understanding the Components of Self-Employment Tax

  1. Social Security Tax: This tax funds retirement, disability, and survivor benefits under the Social Security program. As of 2024, the Social Security tax rate is 12.4% on the first $147,000 of net earnings from self-employment. However, only half of the self-employment tax is deductible from income taxes.
  2. Medicare Tax: The Medicare tax funds the Medicare hospital insurance program. The Medicare tax rate is 2.9% on all net earnings from self-employment. Unlike the Social Security tax, there’s no income cap for Medicare tax, meaning you’ll pay it on all your self-employment income.

How Self-Employment Tax is Calculated

Self-employment tax is calculated based on your net earnings from self-employment, which is your gross income minus allowable business expenses. The net earnings figure is subject to the Social Security and Medicare tax rates mentioned earlier.

To calculate your self-employment tax:

  1. Determine your net earnings from self-employment.
  2. Multiply your net earnings by 92.35% (to account for the fact that only 92.35% of your net earnings are subject to self-employment tax).
  3. Apply the appropriate tax rates: 12.4% for Social Security tax and 2.9% for Medicare tax.
  4. Add the calculated Social Security and Medicare taxes to determine your total self-employment tax liability.

Reporting and Paying Self-Employment Tax

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