What Are Self-Employment Taxes?
Self-employment taxes are social security and medicare taxes for freelancers, consultants, and other
self-employed business owners. Under the Self-Employed Contributions Act (SECA), individuals who don’t
have taxes withheld from their wages must pay self-employment taxes. The current self-employment tax rate
is 15.3% of net self-employment income.
Many consultants, freelancers, and other self-employed workers mistakenly believe their tax obligations
won’t change much once they leave their 9 to 5 jobs and are responsible for their own business accounting.
However, once you become self-employed, you often end up with greater responsibility for small business
taxes. Since you’re not an employee, you don’t have an employer to deduct taxes from every paycheck. As a
result, you’re responsible for calculating taxes, making the required payments to the Internal Revenue
Service (IRS), and filing the necessary tax forms yourself.
As a self-employed business owner, you must pay self-employment taxes on net business income over $400 per
year. We’ll cover how self-employment taxes are calculated, how and when to pay the taxes, and the
accompanying tax forms that you have to submit to the IRS. Self-employed individuals have more tax
responsibilities, but understanding the rules can put you ahead of the game and save you money.
Who Has to Pay Self-Employment Taxes?
Virtually everyone who earns income in the United States must pay social security and medicare taxes. If
you’re an employee, then your employer will withhold these taxes as payroll taxes from every paycheck. The
employer will also pay their own portion of social security and medicare taxes. For employers and employees,
these taxes are called FICA taxes after the Federal Insurance Contribution Act.
For self-employed individuals, these are called SECA taxes after the Self-Employed Contributions Act
(SECA). There’s no employer-employee share of SECA taxes—the self-employed individual pays the entire share
out of their net earnings. Anyone who earns over $400 in self-employment net income in a year must pay
self-employment taxes. This is true even if you’re already retired or receiving social security and medicare
Independent contractors, freelancers, consultants, sole proprietors, partners in a partnership, and members
of limited liability companies that are taxed as disregarded entities must pay self-employment taxes.
Partners in a partnership and members of a multi-member LLC must pay self-employment taxes on their
respective share of the business’s income. In most cases, corporate shareholders who actively work for the
corporation are considered employees subject to FICA tax withholding.
How Much Are Self-Employment Taxes?
The lesson to be learned from this example, is how vital it is for self employed individuals to seek out the advice of a CPA several times during the year.
Even if your salary is not the $350,000 example above, there are hefty tax rates that self-employed people are subject to. It is absolutely
crucial you have periodic "tax liability analysis and tax planning" several times during the year, before "the fat lady sings". After December 31st,
, there is very little tax planning that can be done in NaN to reduce your tax year liability.
How to Report and Pay Self-Employment Taxes
Remember, self-employment taxes are calculated on net self-employment income. You’ll calculate your net
self-employment income by starting with Schedule C. On Schedule C, you will report your total business
revenue for the year, and then make any allowable business tax deductions. That will give you your taxable
self-employment income that you report on form 1040.
At that point, you must fill out Schedule SE, which is a self-employment tax form that will help you figure
out how much you owe in self-employment taxes. Add the result of Schedule SE to line 58 of form 1040.
Although paying both the employee and employer tax rates might seem pretty hefty, there’s some good news. You get a deduction for half of
your self-employment taxes. The IRS treats the “employer side” of self-employment taxes as a
deductible expense to make taxes more equitable for self-employed individuals. The deduction gets reported
on line 27 of form 1040.
Employers must deposit FICA taxes on a periodic basis throughout the year. Since there’s no employer for
self-employed individuals, the self-employed must pay estimated taxes on a quarterly basis. Form 1040-ES
will help you calculate your estimated taxes, and you can send payment through the Electronic Federal Tax
Payment System (EFTPS).
The tables below show the and for self-employed individuals for and NaN:
Here are the upcoming quarterly due dates for self-employment taxes:
- April 15, : First quarter (covering Jan. 1 to March 31)
- June 15, : Second quarter (covering April 1 to May 31)
- September 15, : Third quarter (covering June 1 to Aug. 31)
- January 15, NaN: Fourth quarter (covering Sept. 1 to Dec. 31)
Make sure you put these due dates in your business calendar, to avoid paying penalties and back taxes.
Avoid Penalties on Your Self-Employment Taxes
You should always do your best to meet your self-employed tax obligations. Some of the consequences of not
meeting your tax obligations are pretty severe:
Penalties and interest : As mentioned above, failure to make estimated tax payments as
required can lead to underpayment penalties and interest. The interest continues to accrue until the
balance is paid in full, even if you set up a payment plan with the IRS.
Backup withholding : In some cases, the IRS or your state tax agency may determine you
should be subject to backup withholding. When this happens, the tax agency sends a letter to anyone you
have done business with in the past, instructing them to withhold a sizable percentage of any future
payments due to you. This backup withholding amount must then be remitted by the business to the tax
Seizure of assets : Even though the IRS and your state tax agency prefer to avoid this
step, they will enforce this consequence if the amount due is large enough or if you ignore their attempts
to collect taxes due. The most common form of asset seizure is a tax lien on your bank account. If you owe
a large amount of money for taxes and fail to make—and keep—arrangements to pay those taxes, the IRS and
other tax agencies may instruct your bank to forward most or even all of the money in your bank accounts
What’s the best way to avoid potential tax pitfalls? Work with a tax professional or certified public
accountant (CPA). A tax professional who is privy to your entire financial situation, not just your business
tax situation, can advise you on how to best fulfill your tax obligations.