How is Self-Employment Tax Calculated?
Self-employment tax primarily consists of Social Security and Medicare taxes for individuals who work for themselves. It is important to note that self-employed individuals must pay both the employee and employer portions of these taxes. Below is a structured overview of how self-employment tax is calculated:
1. Determine Your Net Earnings
Your net earnings are calculated by subtracting any allowable business expenses from your gross income. If your gross income is $30,000 and your business expenses total $10,000, your net earnings would be $20,000.
2. Calculate Self-Employment Tax Rate
The self-employment tax rate is currently 15.3%. This figure includes:
- 12.4% for Social Security (on income up to a limit)
- 2.9% for Medicare (no income limit)
3. Apply the Self-Employment Tax Rate
To determine your self-employment tax, multiply your net earnings by the self-employment tax rate:
Self-Employment Tax = Net Earnings × 15.3%
4. Deduct the Employer Portion
Half of your self-employment tax can be deducted from your taxable income when filing your personal tax return. This deduction helps to lower your overall taxable income.
5. File Your Taxes
Use Schedule SE (Form 1040) to calculate and report your self-employment tax when you file your annual income tax return.
Knowing how to correctly calculate your self-employment tax is crucial to fulfilling your tax obligations and avoiding penalties.