Self-Employment Tax: What It Is and How It Works

When tax season rolls around, self-employed individuals can feel particularly overwhelmed. All of the unfamiliar lingo, unique tax forms, and filing deadlines can be a lot to take in. One of the biggest areas of confusion for the self-employed is self-employment tax (SE tax)—what it is, who pays it, and how to calculate and pay it. Read on to learn all about SE tax and get the details you need to get through tax time with ease.

What Is Self-Employment Tax?

Self-employment tax is the tax that Self-Employed/Small Businesses owners are required to pay in order to fund Social Security and Medicare programs. This tax is paid in addition to regular income tax and is based on an individual’s self-employment income, which is calculated on Schedule C or Schedule F of their tax return.

Who Has to Pay Self-Employment Tax?

The self-employed are the only ones who are subject to the SE tax. This can include anyone who is in business for themselves or has a part-time gig such as freelance writing, rideshare driving, or running an Etsy shop. The SE tax only applies to businesses and individuals who earn money from self-employment activities, and does not include salary income from a traditional employer.

What Is the SE Tax Rate?

The SE tax rate is set by the IRS, and for 2021, the rate is 15.3%. This rate reflects the amount an employer and employee would have paid for Social Security and Medicare taxes on earned income such as salary. An individual’s SE tax rate includes 12.4% for Social Security and 2.9% for Medicare tax. In addition, self-employed individuals are allowed to deduct half of what they pay in SE tax when filing their tax returns, making the effective rate 7.65% instead of 15.3%.

How Do You Calculate and Pay Self-Employment Tax?

The amount of SE tax you owe is based on your net self-employment income. Self-employment income is all your total income from self-employment, minus expenses and other allowed deductions. To calculate the amount of tax you owe, multiply the amount of self-employment income you earned by the SE tax rate of 15.3%.

For most self-employed individuals, SE tax payments should be made quarterly via the IRS’s quarterly payment form, Form 1040-ES. On this form, you will enter the estimated amount of SE tax you have to pay for the year, as well as the payments you make for each quarter. The SE tax is then deducted from any amount you are due for the year and does not need to be paid until April 15th when you file your return.

When Are Self-Employment Tax Payments Due?

Generally, the due dates for paying SE tax are similar to those for paying regular income tax—April 15th of the following year, or quarterly if you submit estimated payments throughout the year. Unlike other taxes, however, the due dates for making estimated payments on SE tax tend to be more flexible, and if you can’t make your payment on time, you can file an extension to reduce interest and penalties.

What Is The Social Security Wage Base Limit?

The Social Security wage base limit is the maximum amount of earnings on which the Social Security part of the SE tax is applied. This amount typically increases each year and in 2021, the wage base limit is $142,800 (subject to change by the IRS). If you make more than this amount from self-employment, you will not owe any additional Social Security tax—only Medicare tax.

Are There Any Self-Employment Tax Exemptions?

Most self-employed individuals must pay the full amount of self-employment tax each year, but some are eligible for exceptions. For example, if an individual’s earned income is less than $400, they are not required to pay SE tax. In addition, some individuals, including partners in partnerships and members of LLCs, may be exempt from SE tax under certain circumstances.

Understanding Self-Employment Tax

Understanding SE tax can be overwhelming, but with the right information, you can get through it with ease. Self-employment tax is a tax that Self-Employed/Small Business owners are required to pay in order to fund Social Security and Medicare programs. The SE tax rate is 15.3%, but individuals are allowed to deduct half of what they pay in SE tax when filing their tax returns, making the effective rate 7.65%. For most self-employed individuals, SE tax payments are made quarterly via Form 1040-ES. Additionally, some individuals may qualify for exemptions from SE tax. Taking the time to understand SE tax can help you better plan for it and ensure that you pay what you owe in the right way and at the right time.