For those of us who earn self-employment income–either as freelancers or through owning a business–tax time can be especially painful. Self-employment taxes can seem like a double hit. You pay your income taxes, and then you pay self-employment taxes, too. Why? What are self-employment taxes?
Scroll down to find out all about the self-employment tax, including how much it is, who has to pay it, and how you have to pay it.
What are self-employment taxes?
Self-employment taxes in the U.S. are how sole proprietors, independent contractors, and some partners in businesses pay the Medicare and Social Security taxes that other workers pay via payroll taxes, also known as FICA (Federal Insurance Contributions Act).
Self-employment tax is calculated and paid when you file your federal income tax, but it is not part of your income taxes. When you are employed, your employer takes these taxes out of your paycheck, and the total amount you paid for the year is detailed in your W-2. However, when you are self-employed, these are paid all at once when you file your income taxes, though if you make quarterly estimated tax payments, self-employment taxes are part of that.
How much are self-employment taxes?
The self-employment tax rate is 15.3% (12.4 percent for Social Security and 2.9 percent for Medicare). However, this applies only up to a certain income level.
For 2024, the first $168,600 of your self-employment income is subject to the Social Security tax portion of the self-employment tax. This means you pay 12.4% on that amount. Any income exceeding that amount is not subject to the Social Security tax, but the 2.9% Medicare tax still applies to all your self-employment earnings.
Who must pay self-employment taxes?
Anyone (excluding certain church employees) with a self-employment income of at least $400 is required to pay self-employment taxes.
How do I file self-employment taxes?
Self-employment taxes are entered on line 56 of your 1040. However, this amount is calculated on Schedule SE. If you are filing a Schedule SE, you will also be filing a Schedule C (used to calculate profit or loss from a sole proprietorship), Schedule F (used by farmers), or Schedule K-1 Form 1065 (used for partnerships and joint ventures).
How can I reduce my self-employment taxes?
How much you pay in self-employment taxes is based on your net business income, so the only way to reduce your self-employment taxes is to reduce your net income. Be sure you are taking all the self-employment deductions you are allowed on your Schedule C (or other business income tax schedule), as this will reduce your net business income. Deductions on Schedule A or IRA contributions do not reduce your net business income and will not reduce your self-employment taxes.
Can I deduct my self-employment taxes?
You can deduct half your self-employment tax when figuring your gross adjusted income. This will reduce the amount of income tax you pay. Because you are your own employer, you are entitled to deduct half of the FICA taxes that you pay as an employer, just as any other employer would.