Your guide to self-employment tax

A 15.3% tax that self-employed individuals need to pay

Derek Silva

Derek Silva

Published March 30, 2020

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KEY TAKEAWAYS

  • You must pay self-employment tax if you had at least $400 of net earnings (net profit) that didn’t already have taxes withheld by an employer

  • Self-employment income is 15.3% of your net earnings from self-employment income, with 12.4% going to Social Security and 2.9% going to Medicare

  • You can pay your tax by completing Form 1040 Schedule C and Schedule SE

  • Anyone with self-employment income may also have to pay estimated taxes

All employers are required to withhold certain taxes from their employees’ pay. These include the FICA taxes, which help fund Social Security benefits and Medicare. Employers and employees each contribute an equal amount to FICA taxes. Self-employed individuals don’t have an employer to withhold that tax, and so they need to pay the entire tax themselves, in the form of self-employment tax, sometimes called SE tax or SECA tax.

Self-employment tax is a 15.3% tax that individuals must pay if they have income that was not already subject to withholding by an employer. The self-employment tax rate is 15.3%, consisting of two separate taxes: 12.4% that goes to Social Security and 2.9% that goes toward Medicare. You only pay the tax if your net earnings (net profit) exceeded $400.

Normally, employees only have to pay half of the FICA taxes, worth 7.65% of their income (half of 15.3%). Since the tax for self-employed workers is twice that normal tax amount, the federal government allows a self-employment tax deduction worth half the value of your self-employment tax.

There are multiple forms you will need to fill out to report self-employment income, pay the tax, and claim the deduction. Start with the standard income tax form, Form 1040, then complete and attach Schedule C, Schedule SE, Schedule 1, and Schedule 2.

Who needs to pay self-employment tax

You need to pay self-employment tax if you meet either one of these criteria:

  • You have net earnings of at least $400 from self-employment.
  • You have income of $108.28 or more from working as a church employee

Self-employment income is anything you earned that didn’t already have tax withheld, and it’s often reported on Form 1099-MISC or Schedule K-1. Income reported on a W-2 should already have had tax withheld.

Individuals who may have to pay self-employment tax include sole proprietors, independent contractors, farmers, and some partnerships. If you had self-employment income from multiple jobs or multiple businesses you own, your combined earnings are used to determine whether you need to pay SE tax. This includes “gig economy” workers such as delivery people and Uber drivers.

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Note that church employee income doesn’t include any wages you made from working as a minister, a member of a religious order, or a Christian Science practitioner. You will need to pay the self-employment tax for any other church income of more than $108.28 (or if you have more than $400 from other sources of income). Church employees are exempt from self-employment tax if they filed Form 4361 (an application for exempting ministerial income). Learn more about tax for church employees from the IRS instructions for Schedule SE.

Estimated taxes

If you earn enough self-employment income such that you will owe $1,000 or more in tax when you file your federal income tax return, you should pay quarterly estimated taxes. Estimated taxes require you to pay tax each quarter since you don’t have an employer to withhold income tax from your paychecks.

See who needs to pay estimated taxes.

What are my net earnings?

Self-employment tax only applies to your net earnings, which generally means your net profit, or your gross income minus business expenses. So if you made $1,500 from self employment but only $300 of it was profit, then you don’t have to pay self-employment income tax.

The following types of income may also count toward your net self-employment earnings:

  • Rental income from a farm
  • Payments from the Department of Agriculture for your participation in a land diversion program
  • Payments for the use of rooms or other space you provided to a tenant, including hotel rooms, parking lots, storage spaces, tourist camps, and trailer parks
  • Income from selling newspapers, if you’re at least 18 years old and kept the retail profits
  • Certain commissions you received for work as a self-employed insurance agent or salesperson
  • Income from a fishing vessel with a crew of less than 10 workers
  • Fees paid to you for your work as a fee-based state or local government offical
  • Income (or loss) from the trade of section 1256 contracts, such as regulated futures contracts, foreign currency contracts, or dealer equity options

Notable exceptions from self-employment net earnings are fees you receive for your work as a notary public and certain transactions involving timber, coal, or domestic iron ore.

How to file self-employment tax

There are a few forms you need to file if you have self-employment income:

  • Form 1040, the basic income tax form that everyone needs
  • Schedule C, to determine your net profit (net earnings)
  • Schedule SE to calculate your self-employment tax and your self-employment tax deduction
  • Schedule 1, to list your net profit from Schedule C and your self-employment tax deduction
  • Schedule 2, to list the value of your self-employment tax

For help with the rest of your tax return, see our 2020 guide to Form 1040.

Calculate your net earnings

Start by filling out Schedule C. Schedule C takes you through calculating your net profit or loss from self-employment. To complete Schedule C, gather any forms or invoices you have that list your income. A common income form is Form 1099-MISC. If you have no business losses, such as if you earned $500 from freelance writing and didn’t have any business expenses, then all of your income was profit.

Write your net profit (or loss) on Schedule 1. Schedule 1 is also where you report additional income, like unemployment income, and certain deductions, like the student loan interest deduction.

Calculate your self-employment tax

Next, fill out Schedule SE to calculate your actual self-employment tax. This form will require you to list your net profit from Schedule C as well as any income you have from a Schedule K-1. After calculating your tax, you need to write it on Schedule 2.

Your self employment tax is calculated as follows:

  • First, calculate 92.35% of your net earnings, because only that amount is subject to SE tax. If the result is less than $400, you don’t owe any self-employment tax.
  • Second, calculate 12.4% of your first $132,900 of net earnings, for Social Security tax. For 2020, you only have to pay Social Security tax on your earnings up to $132,900. If you earn more than $132,900, your Social Security tax for 2019 will be $16,479.60.
  • Third, calculate 2.9% of your net earnings, for Medicare tax, and add it to the value of your Social Security tax.
  • Fourth, you need to calculate an additional Medicare tax of 0.9% on just the amount of your earnings above $200,000 if you’re a single filer, head of household, or qualifying widow(er); $250,000 if you’re married filing jointly; and $125,000 if you’re married filing separately. This is sometimes called the Medicare surtax.

Learn more about choosing a filing status.

Determine your self-employment tax deduction

After finding your tax, Schedule SE will also allow you to calculate your self-employment tax deduction. The self-employment tax deduction is calculated by simply multiplying your tax by 50%.

Since employers usually pay half of a worker’s Social Security and Medicare taxes, the federal government allows self-employed individuals to deduct half of the self-employment tax. The deduction does not decrease the value of your self-employment tax. It is factored in after you calculate your tax and it decreases the overall income tax you owe.

Write the value of your deduction on Schedule 1. This is an above-the-line deduction, which means you can take it even if you don’t itemize your deductions.

Learn about other potential tax savings with these 50 tax deductions.

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Personal Finance Expert

Derek Silva

Personal Finance Expert

Derek is a tax expert at Policygenius in New York City. He has written about multiple personal finance topics in the past, and his work has been covered by Yahoo Finance, MSN, Business Insider and CNBC.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.

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