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How Self-Employment Taxes Work

By Jordan Wathen - Updated Mar 13, 2018 at 1:54PM

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Here's how self-employment taxes work. See the table and example for tax rates, income limits for Social Security taxes, and how to calculate what you owe in the 2016 or 2017 tax years.

Self-employed people and business owners are responsible for paying self-employment tax, also known as SECA taxes. These federal taxes are assessed as a percentage (15.3%) of your income. The Social Security portion has a limit on how much of your income is taxed, whereas the Medicare portion does not.

Millions of Americans will ultimately owe self-employment taxes. Common types of income that are subject to self-employment taxes include:

  • Income from home-based businesses (yes, even super-small businesses)
  • Income from a business that has not been subjected to payroll taxes
  • Income from freelance work
  • Income from work as an independent contractor

If you had net earnings from self-employment of $400 or more, or earned $108.28 or more as a church employee, the IRS requires that you file a form SE with your 1040 to report your income. 

Self-employment taxes in 2016 and 2017

The table below shows tax rates paid by the self-employed. Pay particular attention to income limitations, which apply to Social Security taxes, but not Medicare taxes.

Type of Taxes

2016 Tax Year

2017 Tax Year

Social Security (OASDI)

12.4% on up to $118,500 of income

12.4% on up to $127,200 of income

Medicare

2.9% on all income

2.9% on all income

Truthfully, "self-employment taxes" is something of a misnomer. Every worker pays these taxes in one way or another. People who work as W-2 employees pay Social Security taxes, too. They pay half the rate (6.2% for Social Security, and 1.45% for Medicare), and their employer kicks in the other half.

Because self-employed people are effectively the worker and the employer, they have to pay both sides of the tax. (When talking about employed people who receive a W-2, these taxes are called "FICA" taxes instead of "SECA" taxes, which refers to self-employment taxes.)

Tax forms

Image source: Getty Images.

Calculating your self-employment tax

Suppose your business generated $100,000 in earnings that you reported on a Schedule C. When you move this figure to Form SE to calculate your taxable self-employment net income, you'd multiply this figure by 0.9235 to arrive at $92,350. This is the amount that will be used to calculate your self-employment taxes.

Using this $92,350 figure, I calculated the amount you would pay in Social Security and Medicare taxes.

Tax Type

2017 Rate

Amount Due

Social Security

12.4%

$11,451.40

Medicare

2.9%

$2,678.15

Total

15.3%

$14,129.55

Self-employment taxes can be a doozy, but half of the self-employment taxes you pay are deductible on a 1040, thus potentially saving you money on federal income taxes.

In this case, the above example person who reported $92,350 in self-employment income could deduct half the $14,129.55 in self-employment taxes from his income ($7,064.78), saving him about $1,766.19 in federal income taxes in the 25% tax bracket. 

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