Self-Employment Tax Rate: Everything You Need to Know
The self-employment tax rate consists of two parts: Social Security and Medicare. 5 min read
2. What Is the Difference Between Being Self-Employed and an Employee?
3. What Is the Difference Between Self-Employed and Independent Contractor?
4. What Are the Tax Rates for Employed vs. Self-Employed Individuals?
5. How Is Self-Employment Tax Calculated?
6. What Is the Difference Between Taxes as an Employee vs. Self-Employed Taxes?
What Is the Self-Employment Tax Rate?
The self-employment tax rate consists of two parts: Social Security and Medicare. For self-employed individuals, the self-employment tax, also called the SE tax, is the money an individual will pay for Medicare tax and for Social Security. The SE tax is equivalent to the FICA tax employers are required to withhold from each employee's paycheck.
Self-employed individuals receive the full amount of pay for their work without any deductions made for Social Security or Medicare. To pay their fair share in these two taxes, self-employed persons can make estimated tax payments throughout the year. If a self-employed individual chooses not to make quarterly estimated payments, taxes are paid when the year-end tax return is due to the Internal Revenue Service.
What Is the Difference Between Being Self-Employed and an Employee?
Several factors determine if an individual is considered self-employed, either as a business owner or as an independent contractor, or an employee, which means being employed by a business or company.
- An employee working for a business or company has their work schedule, work allocation, and all aspects of the way the work is performed controlled by the rules and policies of the company. Employees are also those who receive training for the job and direct supervision.
- An employer has financial control over an employee's pay rate, bonuses, pay increases, and other pay such as vacation, PTO, sick leave, and holiday pay.
- Employees receive benefits from a business or company such as pension, sick pay, vacation pay, insurance, tuition reimbursement, etc.
- An employee has the expectation of being in either a permanent or long-term working relationship with a business or company.
- A self-employed person is responsible for setting their own work schedule, deciding how much work they'll undertake, and determining how the work is to be completed.
- When a person is self-employed, they are responsible for the financial components of their job, which means setting their own pay rates for services.
- Self-employed persons are responsible for their own business expenses and investments in equipment or devices necessary for the job.
- Self-employed people are not prohibited from advertising and making available to the public their specialized services.
- While a self-employed person may work for a client for a long-term period, they are not necessarily a key component to the regular operation of the company or business.
- Self-employed individuals do not receive benefits, and a working relationship with a business or company may not be permanent.
What Is the Difference Between Self-Employed and Independent Contractor?
- Self-employed - This person is considered someone who is self-employed and has a business. The business owner controls the work being done as well as how the work is to be done. A business owner may be part of a partnership or the sole proprietor of a registered business and may work at their business full-time or part-time. For tax purposes, sole proprietor income is reported on Schedule C.
- Independent contractor - This person controls what work he or she will do and how they will do it. The person paying an independent contractor usually is in control only of the outcome of the work. Persons receiving a 1099-MISC form for income earned are considered independent contractors. For tax purposes, 1099-MISC is used to report income.
What Are the Tax Rates for Employed vs. Self-Employed Individuals?
For persons employed by a company and receiving a check with taxes deducted, both the employee and the employer will pay 7.65 percent of the first $128,400 of the employee's covered wages toward Social Security and Medicare taxes.
For self-employed individuals, the self-employment tax rate is higher at 15.3 percent. The amount paid is split with 12.4 percent being paid to Social Security and 2.9 percent being paid to Medicare. However, self-employed individuals are eligible to claim a federal deduction for half the amount of the self-employment taxes they must pay. This is beneficial to the individual as it helps to lower year-end taxes.
An additional 0.9 percent is required for Medicare tax on income for the year that exceeds $200,000 for a single filer. For married couples filing jointly, the additional tax will be paid on annual income over $250,000. For married couples filing separately, the extra tax is paid on income over $125,000.
How Is Self-Employment Tax Calculated?
Several things factor into the calculation for self-employment tax. These include:
- Self-employment income – This is the annual income amount for a self-employed individual that is subject to taxes being deducted.
- Self-employment income calculation – This figure is calculated by multiplying 92.35 percent times the self-employed individual's "net business income or loss" and "the net farm income or loss." Calculating the self-employment income is done so the net income reflects the amount of the employment tax that would normally be paid by an employer in cases where the individual is not self-employed.
- Self-employment non-payment of tax – If, after adjusting a self-employed person's net income, the amount is less than $400.00, there is no self-employment tax imposed on the income.
What Is the Difference Between Taxes as an Employee vs. Self-Employed Taxes?
An employee's annual income is reported on a W-2 form. The W-4 form is used to determine how much tax will be withheld. If taxes are owed, this will be calculated when the tax return is filled out and submitted by the employee. Form 1040 is the standard form for filing income tax.
Income earned by a self-employed business owner is generally reported via Schedule C. An independent contractor reports income via a 1099-MISC form. Any tax due is usually paid via quarterly estimated payments on or around the 15th of April, June, September, and January using form 1040-ES. If quarterly estimated taxes are not paid, they will be calculated on the year-end tax return. The IRS may impose a penalty if the amount due is over $1,000. The tax penalty is based on the tax return. If taxes are owed, the penalty is added to that figure. If there is a refund, the penalty amount will be deducted from that figure.
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