Self-Employment Tax: What It Is and How It Works

What is Self-Employment Tax?

If you’ve ever had a traditional job, chances are you’ve experienced the disappointment of opening your paycheck only to find the IRS has taken their “fair share” for Medicare and social security taxes. A self-employed person doesn’t receive a regular paycheck and, as a result, Medicare and social security taxes are not withheld. However, that doesn’t mean you don’t have to pay! Regular wage earners, or W-2 employees, actually split these taxes with their employer so each is responsible for 50%. Because self-employed people are essentially the employer and the wage earner, they’re responsible for the full tax payment.

Who Has to Pay?

Surprisingly, the IRS keeps things fairly simple with regard to who must pay self-employment tax. According to their website, individuals or small businesses must pay self-employment tax and file Schedule SE (Form 1040) if their net earnings exceed $400.00.

Generally, your net earnings from self-employment are subject to self-employment tax. If you are self-employed as a sole proprietor or independent contractor, you generally use Schedule C or C-EZ to figure net earnings from self-employment. One benefit of being self-employed is that you can deduct the employer portion of your SE tax in calculating your adjusted gross income.

There are also special exceptions for caregivers and church employee income.

How do I Pay the Tax & What Other Taxes Will I Owe?

Most self-employed individuals must file and pay “estimated taxes” using very specific IRS guidelines. These taxes are usually paid quarterly and it’s advisable to carry out tax planning to figure out what you’ll owe. Self-employment tax only covers the Medicare and social security portion. Income tax must still be paid as required by the IRS or state government.

How Much is the Self-Employment Tax?

For self-employment income earned in 2013-2015, the tax rate is 15.3%. These rates can change from year to year. Working with a certified tax professional will help ensure you’re always up-to-date on the latest rates and codes.

Self-Employment Tax Deduction

Many don’t realize you can deduct the employer-equivalent portion of your self-employment tax in figuring your adjusted gross income. This deduction only affects your income tax and not net earnings from self-employment or your self-employment tax. Further, if you file a Form 1040 Schedule C, you may be eligible to claim the Earned Income Tax Credit (EITC).

Is it worth it?

While the tax ramifications of freelancing or starting a small business may seem daunting at first, entrepreneurship can be a rewarding and life changing experience. Don't let taxes keep you from realizing your dream. Most importantly, seek the guidance of a certified tax professional who can help ensure you get off to the right start!

William D. Truax and his friendly team of IRS Enrolled Agents and licensed tax preparers have been helping entrepreneurs and small businesses for over 30 years. They understand how important deductions are for self-employed individuals and offer a full spectrum of financial services to help you get the most out of your return.

For more information, please visit or click below to schedule a free consultation today!