Individuals with $400 or more of net earnings from self-employment must pay self-employment tax, in addition to any income tax imposed on the same income. This article can help you estimate any self-employment tax liability that you may owe.
The self-employment tax consists of two taxes: a tax used to fund Social Security benefits and a tax used to fund Medicare benefits. The Social Security tax rate is 12.4%, and the Medicare tax rate is 2.9%. The combined tax rate is 15.3%.
The first $117,000 (for 2014) of net income from self-employment (reduced by any wages received by the individual) is subject to a 15.3% tax (which includes the Social Security and Medicare health insurance taxes). Income above that amount is only subject to a 2.9% Medicare tax. Taxpayers use Schedule C or C-EZ (Form 1040) to figure net earnings from self-employment (self-employment income). Schedule SE (Form 1040) is used to figure and report self-employment taxes.
Calculating Self-Employment Tax Liability
Step 1. Determine your net income from self-employment (from Schedule C or C-EZ for sole proprietors; from Schedule E, Part II for self-employed businesses treated as a partnership; or Schedule F for farmers). Generally, net income is
your total business receipts minus your total business deductions.
Step 2. Multiply your net income from self-employment by 0.9235. This is your net earnings from self-employment. If this number is less than $400, you do not owe self-employment tax.
Step 3. Multiply by 0.153 the amount of your net earnings up to an amount equal to $113,700 reduced by any wages received (for which there has already been withholding). Additionally, if applicable, multiply any net earnings over $113,700 by 0.029. Add these two numbers together. This is your estimated self-employment tax liability.
Step 4. Report your self-employment tax liability on Schedule SE of Form 1040.
Medicare Surtax – New for Tax Year 2013 and Going Forward
Starting in 2013, there is a new additional Medicare tax of 0.9% for higher-income earners. If a taxpayer’s net self-employment income exceeds a threshold amount, the additional 0.9% tax will be due. For single taxpayers, the threshold is $125,000; for married filing joint, the threshold is $250,000. Net self-employment income is the total of all self-employment from Schedules C, F, and K-1 after any business-related deductions and after the total self-employment income has been reduced by multiplying it by 92.35%.