If you earn income from self-employment -- such as from a small business you own, consulting you do, or freelance work -- it may be subject to self-employment tax. Self-employment tax consists of two parts -- Social Security and Medicare taxes. Here's how your self-employment tax will be determined in 2017, as well as a calculator that can simplify the process for you.
What is self-employment tax?
When you work for an employer, taxes for Social Security and Medicare are typically withheld from your paychecks. In addition to this, your employer matches the amount of tax you pay to both programs.
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Self-employed individuals don't have Social Security and Medicare taxes withheld from their earnings, nor is there an employer making these payments on their behalf. Therefore, both the employer and employee portions of the Social Security and Medicare taxes are the responsibility of the self-employed individual, and are collectively known as the self-employment tax.
In general, you are required to pay self-employment tax if your net self-employment earnings were $400 or more for the year.
Rates and maximums
As I mentioned, there are two components to the self-employment tax -- Social Security and Medicare.
For the 2017 tax year, Social Security tax is assessed at a rate of 6.2% for the employer and employee. Since self-employed individuals are considered to be both the employer and the employee, the Social Security tax rate for self-employed individuals is 12.4%. However, Social Security tax is only assessed on the first $127,200 of earned income.
The Medicare tax rate is 1.45% each for employers and employees, so self-employed individuals pay a Medicare tax rate of 2.9%. Unlike Social Security tax, there is no income cap for Medicare tax. The 2.9% rate applies to all of your earned income, no matter how high it is. In addition, high-income individuals pay an additional Medicare tax, at a rate of 0.9% for any income above $200,000 (single filers) or $250,000 (married filing jointly).
So, the self-employment tax structure for 2017 is:
- 15.3% on the first $127,200 in net self-employment income.
- 2.9% on any net self-employment income above $127,200.
Net self-employment income
To calculate your net self-employment income -- that is, the amount of your self-employment income used to calculate your self-employment tax, simply multiply your total self-employment income by 92.35%, or 0.9235.
For example, let's say that you earn a profit of $130,000 from self-employment in 2017, and you had no other income. Multiplying this amount by 92.35% gives net self-employment income of $120,055. Since this is less than the Social Security taxable maximum, the 15.3% rate would apply to the entire amount, and you would owe $18,368 in self-employment tax. Half of this amount, or $9,184 (the employer's portion) is deductible on your tax return.
How to calculate yours
The calculation for self-employment tax can be a little complicated. To make your life a little easier, here's a calculator that can do the math for you.
* Calculator is for estimation purposes only, and is not financial planning or advice. As with any tool, it is only as accurate as the assumptions it makes and the data it has, and should not be relied on as a substitute for a financial advisor or a tax professional.
You'll notice that there's a place in the calculator for any income you get from an employer. This is because while you'll pay Medicare tax on every dime of earned income, the Social Security wage limit applies to all of your income, not separately to self-employment income.
In other words, let's say that you have a full-time job with an employer, and that you earn a salary of $100,000. On the side, you run a consulting business and earn a net income of $50,000. Since your employer has already withheld Social Security tax on your $100,000 salary, you'll only need to pay Social Security tax on the first $27,200 of self-employment income.
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