Want to learn how much self-employment income is taxable? You’ve come to the right place. Today, we’re going to guide you through everything you need to know about your self-employment tax liability.
Many people are turning to self-employment as another means to make money. Self-employment can come in many forms and can benefit people in a number of ways – from extra income, more free time, and pursuing your true passion.
However, a lot of people don’t realize that self-employment isn’t just an easy walk in the park. Instead, there are tax implications that individuals need to be aware of before deciding to pursue this path of income. If you don’t get the right education, you may find yourself unprepared when tax time comes around.
So, read through to the very end as we discuss how much self-employment income is taxable. You’ll learn what your self-employment tax liability is for the year, and how you can go about paying it (or perhaps even reducing it). First, here’s a brief overview of the self-employment tax implications.
A Brief Overview of the Tax Implications of Self-Employment
Taxes aren’t the same for everyone. Your employment situation will impact what taxes you will be responsible for. Individuals that are self-employed can get caught by surprise when tax season comes around.
Currently, the tax rate is 15.3%. This rate comes from the sum of 2 numbers. The rate is 12.4% for Social Security taxes and 2.9% for Medicare taxes. The self-employment tax rate applies to net earnings (also known as profit), not just self-employment income. Every tax situation is unique but it is common for people to pay taxes throughout the year instead of a one-time payment.
Understanding Self-Employment Tax Rate (Social Security and Medicare Taxes)
Many people believe that the self-employment tax rate is just one number but it actually consists of both Social Security taxes and Medicare taxes.
Individuals that pay self-employment taxes are responsible for the entire 15.3%. This is more expensive for an individual because generally employees split this with their employers. This means they are typically responsible for 7.65% and their employer is responsible for the other 7.65%.
Many people do not realize that they will essentially be responsible for handling double the tax rate since they are considered both the employer and the employee when they are self-employed. This is why self-employment taxes are higher than standard income tax.
Who Has to Pay Self-Employment Tax?
Again, you want to look at the IRS for up-to-date and accurate information about self-employment tax obligations. According to the IRS, an individual will need to pay self-employment taxes if either of the following conditions applies:
- A person’s net earnings from self-employment were at least $400 (excluding church employee income).
- A person had a church employee income of at least $108.28
An individual can expect their net earnings from self-employment to be subject to the tax rate. The specific tax documentation you get will depend on your actual employment. Many people have the common misconception that tax rules will stop being applicable when they reach a certain age. However, that’s not true!
The self-employment tax rules will apply no matter how old an individual is and regardless of whether, or not, they receive other assistance like Social Security or Medicare. Please keep in mind that tax laws can change frequently. In order to ensure you are getting the most up-to-date information, you want to review the IRS website.
For now, we’re going to get into the main topic at hand today. How much self-employment income is taxable?
How Much Self-Employment Income is Taxable?
So, how much self-employment income is taxable? First, understand that your entire income as a self-employed individual is taxable. However, the actual amount you’ll have to pay ranges greatly depending on which tax bracket you fall into, your state’s income tax rate, and how many expenses you’re able to write off.
The actual amount that you will pay will be based on the amount of money you make. We recommend that you get help from a professional like an accountant. You can find individual accountants or you can get help from a company like H&R Block. Either way, a professional can make sure that the amount you pay to the IRS is correct.
However, there are ways that you can calculate your own self-employment tax. It is important that you understand how to do this because you can double-check the work of your accountant if you want to ensure even more accuracy!
Tips for Calculating Your Self-Employment Tax Liability
In order to calculate your self-employment tax, you will first need to calculate your earnings from self-employment in order to understand your net earnings. You need to find your net earnings because that is what the self-employment tax is applicable to. Tips to keep in mind when figuring out your self-employment tax include:
- First, you will need to figure out your net earnings which will be your gross income from self-employment minus your business costs. For example, if your business costs were $100,000 but you made $225,000 then your net earnings would be $125,000.
- A general rule of thumb is 92.35% of your net earnings from self-employment are eligible for self-employment tax.
- Now that you know your net earnings, you can apply the 15.3% tax rate. This means if your net earnings were $125,000 then 15.3% would go towards taxes which is $19,125.
- Keep in mind that in 2021 only $142,800 of earnings was subject to the social security portion of self-employment tax. You need to account for that if your earnings were high enough!
How to Pay Self-Employment Taxes?
In order to pay self-employment tax, you can usually use IRS Schedule C to calculate your total net earnings from self-employment. Next, you will use IRS Schedule SE to figure out the amount you owe in self-employment taxes. Information you will need to provide include your:
- Social Security Number
- Individual Taxpayer Identification Number (ITIN)
Depending on the tax situation, you can expect to pay them as you go. If you decide to wait until the annual tax deadline then you may face late-payment penalties. Quarterly estimated tax payments can help you avoid those penalties.
For more detailed information about how to pay self-employment tax, you should get in touch with a professional like an accountant. Self-employment taxes can be tricky to figure out, especially on your own. If you want to learn where to declare self-employment income, we have a complete guide on the topic.
Is It Possible to Reduce Your Self-Employment Taxes?
If you want to reduce your self-employment tax, then you will need to claim all available self-employment deductions that you can on Schedule C. This will reduce your net business income which will reduce the amount you owe in self-employment tax. You can get more information about the proper forms necessary for self-employment deductions by speaking to a professional or getting information from the IRS website.
Final Thoughts on How Much Self-Employment Income is Taxable
The fact that people need to pay more taxes if they are self-employed can catch people by surprise. Instead of being responsible for just 7.65% that is matched by an employer, an individual will be responsible for the whole 15.3%.
This rate consists of the rates for both Social Security taxes and Medicare taxes and is only applicable on the self-employment net earnings. It can be easy to figure out your net earnings, but in order to be sure that you are properly handling your taxes, you should get the help of a professional.
Now that you know how much self-employment income is taxable, and how to pay self-employment tax, you should feel more confident in your current situation. however, we still recommend investing in professional help when it comes to taxes. You could end up saving more money with the help of an expert!
In the meantime, check out other self-employment resources we’ve curated for you. Our guide on self-employment for retirees, applying for unemployment while self-employment and wage garnishment for self-employed people are must-reads if you’re going to take your financial future into your own hands!