A 2019 FreshBooks research report called “Self-Employment in America” revealed that the number of self-employed Americans is rising rapidly. Roughly 24 million people in the U.S. now employ themselves, including freelancers, gig workers, independent contractors, small business owners and startup founders.
1. Know the definition of self-employment tax
Self-employment tax includes Social Security and Medicare taxes. Since self-employed individuals don’t receive traditional paychecks where taxes are deducted from each check, the self-employment tax replaces the traditional Social Security and Medicare withholding.
2. Understand how to calculate self-employment tax
Use Schedule SE that accompanies Form 1040 or 1040-SR for tax filings. This schedule serves as a worksheet to calculate your self-employment tax. The tax rate is 15.3%, which consists of 12.4% for Social Security and 2.9% for Medicare.
3. Determine if you actually need to pay self-employment tax
Self-employed individuals who have a trade or business and operate as a sole proprietor or an independent contractor must pay self-employment tax. This tax is paid in addition to income tax paid by small business owners, freelancers, gig workers, and more.
4. Remember that self-employment tax is also a deductible expense
It’s possible to deduct a portion of your self-employment tax to offset some of your income tax. However, that does not affect self-employment net earnings or self-employment tax. Additionally, if you file a Schedule C with your Form 1040 or 1040-SR, you may be eligible for the Earned Income Tax Credit (EITC).
Your self-employment tax amount is recorded on your tax filing and becomes part of the overall calculations that will determine if you will owe money or if you will receive a refund.
6. Reach out to a tax professional for advice about self-employment tax
Self-employed individuals can quickly face complex tax filings, which may lead them to miss out on deductions or benefits or even to file incorrectly and risk incurring fines. Typically, employers perform many of the tax calculations for a traditional employee.