How to Calculate Self-Employment Tax

calculate self-employment-taxIf you own your own business, working for yourself, you are required to pay self-employment tax.

Figuring self-employment tax isn’t that difficult; all you need to do is make use of Schedule SE.

Who Owes Self-Employment Tax?

Self-employment tax is meant to collect payroll taxes from those who are self-employed. For those who work for “the man,” payroll taxes — those taxes collected for Social Security and Medicare — are automatically taken out of the paycheck. If you’re self-employed, you obviously don’t have that luxury, and you have to figure and pay your own tax, in the form of the self-employment tax.

You are supposed to pay self-employment tax if your net earnings from self-employment are $400 or more during the tax year. And, if you are a church employee, you are expected to pay the self-employment tax if you earn $108.28 or more during the tax year. Realize, too, that you are supposed to report all of your income, even you won’t be paying the self-employment tax on it.

How Do You Figure What You Own in Self-Employment Tax?

When you figure your self-employment tax, you need to first figure your net earnings. The Schedule C can be used to figure your earnings if you are a sole proprietorship, or if you have a LLC.

If you complete a business tax return, you can use those forms to help you figure your net earnings if you have a LLC or S-Corp. In any case, once you have your net earnings, it’s time to get out Schedule SE and determine what you owe in self-employment tax.

The directions are fairly simple. Schedule SE tells you exactly where to get the information you need to fill out the form and figure your tax. Once you know how much you have made you multiply your amount by the self-employment tax rate. Right now, that rate is 13.3% on up to $106,800.

If you have more than that, the result is multiplied by 2.9% and you are required to add $11,107.20 to the result. Remember that the 13.3% rate represents a reduction in regular payroll taxes, due to the 2010 Tax Relief Act. When the act expires, if it isn’t extended, the rate will go up 2%.

There is also a deduction you can take for the employer-equivalent portion of your self-employment tax. Directions for taking that are on the Schedule SE. That deduction is then added to your Form 1040 or Form 1040NR to reduce your total income when figuring what you owe in income taxes. This is a small bonus, and a way to reduce the impact of paying self-employment taxes.

Paying Self-Employment Tax

Next, of course, you have to pay your self-employment tax. These taxes are usually paid along with your “regular” taxes. You can pay throughout the year by including your self-employment tax as part of your estimated quarterly taxes.

If you know how much you owed the previous year, it can be fairly straightforward to make sure that you pay what you owe. You won’t be charged penalties if you pay 100% of what you paid last year.

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Comments | 6 Responses

  1. says

    Oh man. Taxes are my least favorite topic about finances, but one that I really need to understand better. I haven’t paid quarterly taxes yet this year, but should be ok since I technically had a loss last year..or I could be totally wrong, that’s why I use a professional for my taxes.

  2. says

    I used to calculate this when I did taxes when I worked for a CPA firm. It hasn’t effected me yet and with some proper tax planning you can normally get a proper business structure that doesn’t have to pay that specific tax. You won’t get SS credits though if you don’t pay the taxes.

  3. says

    There are a number of reasons for wanting to start your own business. Some people just want to be their own boss, and enjoy the freedoms of working from home. Others are simply in need of creating revenue, beyond their current pay rate.

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