Casey Moss Tax & Accounting

How is Self-Employment Tax Calculated?

Every wonder why it feels like you pay so much in taxes when you are self-employed? Here's how it's calculated.

Who is considered self-employed?

Before we get into the numbers, let’s define what we mean when we refer to a self-employed person for self-employment tax purposes. The only people that are subject to self-employment taxes are sole-proprietors, single-member LLC owners with no tax election in place (i.e. you are not treated as an S corporation), and general partners in a partnership that files form 1065.

 

Sometimes limited partners in a partnership are not subject to self-employment taxes because they do not actively participate in the business activities. However, be aware that small partnerships that produce non-passive income should generally be subject to self-employment taxes.

What is self-employment tax?

Self-employment taxes are separate from income taxes. They are essentially the self-employed person’s way of paying into Social Security and Medicare. When you are an employee, your employer withholds these taxes from your paychecks (also known as “FICA” taxes). The current rates are 6.2% for Social Security and 1.45% for Medicare, totaling to 7.65%. Your employer then matches these percentages, making the total amount paid in 15.3%.

 

When you are self-employed, you are responsible for both the employee and the employer side of these taxes. This can be a shock to newly self-employed people who haven’t budgeted for these additional taxes.

How is it calculated?

While it may seem like a straight forward percentage, the calculation is a bit more complex. Let’s say we have a single person that has $50,000 in wages from an employer, plus $30,000 in self-employment income from a sole proprietorship (after all expenses). To start, let’s calculate the total self-employment tax that will be due from the $30,000 in self-employment income.

 

An important thing to understand is that employers are entitled to a deduction for the portion of self-employment taxes that they pay. This means that for self-employed people, there is a deduction available for half, or 7.65%, of the self-employment taxes due. So in order to calculate the total self-employment taxes due, we need to adjust for the amount the employer gets to deduct first. Here’s how that works:

Because of the deduction for the employer portion of the taxes, we can’t really say that self-employment tax is a flat 15.3% of net income. Instead, it is more accurate to say that it is 14.13% of net income, calculated as follows:

What about income taxes?

Budgeting for self-employment taxes is one thing. However, self-employed people also need to be worried about income taxes. Here is how we would go about calculating the income taxes due for this same individual:

Isn’t that fun? If you would rather not worry about this kind of thing, hire an accountant. I help all of my self-employed clients budget for their taxes so there are no surprises at the end of the year. Contact me today!

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