If you’re self-employed with a part-time gig, a thriving small business, or a full-time freelancer, you’re supposed to pay a self-employment tax known as SECA, from the Social Security/Medicare Act. There’s no employer to deduct money from your paycheck and send it to the IRS according to your income. 

You also have no one to share the burden of paying social security and Medicare taxes. It’s your responsibility to understand calculating, filing, and paying SECA. Here’s our guide to walk you through how is self-employment tax calculated. 

What Is Self-Employment Tax?

Anyone self-employed is a person who carries out business as a sole trader or independent contractor, a member of a partnership that does business, or a gig worker. You must pay a federal tax known as SECA if you belong to any of those categories.

The tax was introduced by the Self-Employment Contributions Act (SECA) in 1954 which requires everyone self-employed to pay 15.3% off their net income. The tax equals the amount of social security and Medicare taxes. This tax works just like Federal Insurance Contributions Act (FICA) which employers deduct from their employees paychecks as payroll tax. 

Self-employment tax is usually higher than FICA tax since you don’t have an employer to contribute for you. Employers determine the tax on behalf of their staff. For SECA, you determine the tax yourself using Form 1040 or 1040-SR. 

Is Self-Employment Tax And Income Tax The Same?

Self-employment tax and income tax are not the same. Income tax is a deduction on any earnings regardless of the nature of employment. Self-employment tax is for self-employed individuals who don’t have employers to withhold and contribute toward their social security and Medicare taxes.

An employee receives a W-2 at the end of the year from their employer. It reveals total earnings and the amount of federal and state taxes held. Self-employment tax is an avenue for paying federal tax income and SECA tax.

Employers help their staff pay tax by withholding it from their pay. An employee signs a W-4 before employment begins. It authorizes an employer to withhold federal income tax from your salary. An employer withholds a percentage from a worker’s salary and the employee tops up the balance of income tax. 

Self-employed individuals pay taxes by making quarterly estimated payments. The amount of self-employment tax covers federal tax and SECA. The amount paid is just an estimate and can be figured out when filing annual tax returns. The IRS offers an online tax withholding estimator to determine how much the employer can withhold from your salary. 

All income regardless of whether you’re self-employed or an employee is subjected to federal tax income and SECA.

Who Is Taxed?

People who must pay SECA and file Form 1040 or 1040-SR have particular categories. Anyone with a net earning of $400 or more from self-employment must pay this tax. There’s an exemption for church employees. You must also pay self-employment tax if you’re a church employee earning over $108.28. 

Schedule SE allows figuring out net earnings from self-employment. Figuring out your total earnings subject to tax is crucial before determining net earnings. The law regarding paying self-employment tax applies to anybody regardless of age. It also applies to those receiving social security and Medicare. 

The IRS considers freelancers, independent contractors, sole proprietors, or those in a partnership to be self-employed and liable to pay this tax. However, you get some relief as your income increases on the 12.4% social security you’re supposed to pay. 

The maximum income subjected to social security tax increased from  $142,800 in 2021 to $147,000 in 2022. You reach this limit by combining all your earnings from a regular job, which would have social security already withdrawn, and side hassle.

 If your earnings from a side job are over $200,000 expressed as a single filer or $250,000 filed jointly for marrieds, the IRS charges an extra 0.9% as Medicare taxes. 

Tips To Calculate Self-Employment Tax

Here are some tips on how to calculate self-employment tax. 

Calculate Net Income

You must understand how much tax do self-employed pay if you earn over $400. The amount of tax is 92.35% of your net earnings. Calculating net income requires deducting business expenses from your gross income. 

Gross income is all earnings from clients annually before deducting expenses. Clients don’t usually withhold taxes when paying freelancers and independent contractors. Net income is what is left after subtracting all qualifying business expenses and estimated tax payments from the gross income. The IRS uses this to determine your annual tax liability. 

Know Self Employment Tax Rate

According to the IRS, The self-employment tax rate is a percentage of your net income from self-employment. The rate for self-employment tax is 15.3% which is a combination of 12.4% social security tax and 2.9% Medicare tax. It’s calculated from 92.35% of your net income.

Apply The Tax Rate To Net Earnings

Applying the tax rate to your net earnings requires multiplying the tax rate by your net income. However, you must keep the following in mind:

  •  2.9% tax rate applies to your earnings beyond $160,200
  • 15.3% tax rate applies on your first $160,200 of earnings
  • 3.8% tax rate applies to your earnings over $200,000

Only 92.35% of your self-employment income is subject to the 15.3% tax rate. You can determine your tax responsibility manually or using an automatic tool. 

How To Pay Self-Employment Tax?

After understanding how much independent contractors pay in taxes, determining net income and how to determine your tax liability, it’s time to know how to pay the tax. A pay-as-go taxation system exists for taxpayers to keep paying as they earn throughout the year. You can make estimated tax payments:

  • Through mail
  • Online
  • By check
  • By money order using an estimated payment voucher 
  • Through the IRS2Go app

At the end of the year, you must file an annual tax return using Schedule SE (Form 1040) to report your self-employment taxes. You must pay by the quarterly deadline; the first payment by April 15, the second payment by June 15, the third payment by September 15, and the fourth payment by January 15 of the next year. The exception is only if the date falls on a federal holiday or weekend. Then, you pay the next business day. 

Not paying your taxes by the deadline carries an underpayment penalty fee when filing taxes the next time. The IRS determines the penalty depending on the amount of underpayment, its current interest rate, and the original due date. 

Although you’re responsible for paying all these taxes on your own, part of the payment may be deductible. When determining how much self-employment tax you owe, you can lower your net income by half of the tax before applying the tax rate. 

You can also claim the employer portion of 7.65%.of the tax. The self-employment tax deduction affects your adjusted gross income and income taxes. Regardless, you must pay your self-employment tax rate of 15.3%.

Prepare Your Business For Success 

For field service contractors, paying your taxes is an obligation that you can’t ignore. It’s essential to run your business legally. After understanding how to clear your taxes, managing your business efficiently with field management CRM software such as Field Complete is crucial to your business success.