Navigate self-employment taxes like a pro, even if you can’t quite remember the rate.
Many of us aren’t taught about taxes in schools, so we’re here to answer all of your questions so you can approach every April with confidence!
Who Is Considered Self-Employed?
You’re considered self-employed if you’re receiving income from products or services that you’re providing. Some examples of this:
- You’re a sole proprietor or an independent contractor – meaning you’re working as an unincorporated business as a freelancer, like a freelance graphic designer
- You’re a member of a partnership that performs a business or a trade – meaning you’re an incorporated or unincorporated business providing services, like a law firm or an accounting group
- You’re in business for yourself – LLC, C corp, S corp or a gig worker, like an Uber driver or an actor
Self-employed vs. Not Self-Employed
Below are some examples of self-employed vs not self-employed status.
- Daria owns her own Etsy shop selling custom-made jewelry. She makes a full-time business income from this. ✅ Self-employed
- Dan works at a tech startup that just went through its second round of funding. He receives a W-2 form yearly. Not self-employed
- Delilah owns a candle business, with a storefront downtown. She hired a second set of hands, Dani, to whom she provided a W-4 form. Daria is ✅ Self-employed. Dani is not self-employed
Why Do We Need Self-Employment Tax?
Just like W-2 workers, self-employed individuals have to pay taxes, too — but act as both the employee and the employer.
If you’ve ever worked a job full-time as a W-2 employee, you might have seen taxes withheld from your paychecks. That’s because the Federal Insurance Contributions Act (FICA) requires employees to withhold certain taxes from a paycheck. Both W-2 employees and their employers contribute to FICA, which is made up of Social Security tax, Medicare tax and Medicare surtax for a total of 15.3%. The one catch— when you’re a W-2 employee, you only need to pay half of that, which is 7.65%; your employer covers the other half.
If you’re an avid self-employed business owner yourself, you’re in charge of taking on the role of both employer and employee, meaning you have to pay both ends of those FICA taxes. If you’re self-employed, you have to pay the full 15.3% of FICA taxes, which is your self-employment tax rate. This covers the same contributions as if you worked full-time.
What Do Self-Employment Taxes Do?
- Contribute to the Social Security and Medicare systems — think about anyone you know over 65. After the havoc of The Great Depression, President Roosevelt introduced Social Security into the New Deal, assuring that retired folks over 65 years could still get an income, especially if they were disabled. When it’s your time to reap the benefits, you’re entitled to Social Security, whether you’re a full-time, part-time or self-employed worker.
- Serve as an additional write-off — you know that wonderful part of being a small business owner where you can write off the money you’ve spent on business-related commodities? Self-employment taxes are no exception. You can write off half of the amount, or 7.65%, come tax season.
How to File Self-Employment Tax
Remember the magic number of 15.3%, which is the American self-employment tax rate? It’s calculated on the net income of the business owner, which makes sense because otherwise, it would be taxing your tax!
Remember: As a small business owner, you act both as the employer and the employee. Just like an employer takes out taxes of part- and full-time workers every paycheck, so should you. Put money aside every month (or week or project, depending on how you manage your finances) so you have that money ready come tax season. There’s no worse feeling than having to take out your savings — or worse, a loan or credit card debt — because you didn’t save for your taxes.
Let’s say you run your own pet-sitting business as an LLC. Last year, in 2022, you earned a net profit of $50,000. Your 1099 (Schedule SE) will have you multiply this by 92.35% of your net earnings by subtracting certain expenses, which will come out to $46,175, your net earning subject to self-employment tax.
Then, you’ll take out your self-employment tax from this, multiplying $46,175 by 15.3% to equal $7,064 in self-employment taxes (half of which you can write off).
You’d write this down in your “other taxes” section on form 1040.
How to File Taxes
You can file taxes in one of three ways:
- File by mail. Find your needed tax forms to print online (or sometimes local libraries have them available).
- File online. Use an online tax tool like TurboTax to help you through it.
- File using a human tax preparer. Use a tax pro like an accountant, CPA or tax professional at doola who has access to all your small business information from formation to bookkeeping for an all-in-one spot.
You Don’t Have to File Taxes Alone!
Running your small business should inspire you not terrify you. You see the benefit of running your business like taking advantage of tax write-offs, making your own schedule and doing what you love. So why not get some help so you can maximize your small business owner lifestyle?
doola Banking — manage your business all in one place so you never have to fish through restaurant charges to find your business subscription again.
doola Bookkeeping — financial management on autopilot with monthly financial reports, business categorization, and expert review.
doola Tax Package — easy tax filing by a trusted CPA and ongoing customer support.
doola Total Compliance — the whole shebang to focus on your favorite parts of the business and let someone else do the rest.
What kinds of jobs are exempt from paying self-employment tax and why?
nly businesses exempt from self-employment taxes are church ministers (ordained, commissioned or licensed), Christian Science practitioners and religious order members who have taken a vow of poverty. Otherwise, if you’ve made less than $400, then you’re exempt from paying self-employment tax.
How do I pay social security and medicare taxes for self-employed?
Both Social Security (12.4%) and Medicare taxes (2.9%) are covered through your self-employment tax (15.3%), which can be found on your 1040 tax form.
Is self-employment tax an addition to income tax?
Self-employment tax is a FICA tax, and FICA is paid in addition to income tax (it’s not included).