Self-Employment Tax is the tax self-employed individuals must pay to cover their contributions to Social Security and Medicare. Unlike employees, who split these taxes with their employer, self-employed individuals are responsible for the full amount. The self-employment tax rate is currently 15.3%-12.4% for Social Security and 2.9% for Medicare. For high-income earners, an additional 0.9% Medicare tax may apply.
This tax is calculated using IRS Schedule SE and is based on net earnings from self-employment.
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Key Facts
- Purpose: Covers Social Security and Medicare contributions for self-employed individuals.
- Rate: 15.3% total: 12.4% for Social Security (up to the wage cap) and 2.9% for Medicare (no cap).
- Threshold: Applies if you earn $400 or more in net self-employment income during the tax year.
- Deduction: You can deduct half of your self-employment tax (7.65%) as an above-the-line deduction on Form 1040.
- Reporting: Calculated on Schedule SE and reported on your individual tax return.
1. Who has to pay self-employment tax?
Anyone who earns $400 or more in net income from self-employment, including freelancers, gig workers, sole proprietors, and independent contractors.
2. Is self-employment tax the same as income tax?
No, it's separate. Self-employment tax covers Social Security and Medicare, while income tax is based on total taxable income and subject to different rates and deductions.
3. Can I reduce my self-employment tax?
While you can’t reduce the rate, you can deduct business expenses to lower your net earnings and claim an above-the-line deduction for half the tax.
4. Do I need to make estimated payments for self-employment tax?
Yes, if you expect to owe $1,000 or more in combined tax (income and self-employment), you generally need to make quarterly estimated payments.
5. Does self-employment tax apply to LLC members and partners?
Yes, if they are actively involved in the business and receive guaranteed payments or distributive shares considered self-employment income.
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