Up to date for tax yr 2022.
It doesn’t matter what self-employment seems to be like for you, you’re liable for making certain the taxes in your web earnings are paid to the Inner Income Service (IRS). And the self-employment tax (SE tax) is a part of that.
Formally often known as the Self-Employment Contributions Act tax, the SE tax is the self-employed group’s model of the taxes paid by employers and their workers for Social Safety and Medicare.
Whether or not you run a bakeshop on the weekends, writer weblog posts as a contract author, or design logos for native companies, it’s best to understand how the SE tax impacts your cash. Let’s go over the best way to calculate the tax in your self-employment earnings.
Self-employment tax breakdown
Self-employment tax is cut up between two elements: Social Safety and Medicare. It equals 15.3% of your self-employment earnings.
Social Safety
The Social Safety tax price is 12.4 p.c of your self-employment earnings. For 2022, Social Safety taxes should be paid on all earned earnings as much as $147,000 (rising to $160,200 for tax yr 2023). All earnings earned above that threshold will not be topic to Social Safety tax.
Medicare
The Medicare tax price is 2.9 p.c of your self-employment earnings. Medicare has no earnings restrict, so all earned earnings is taxed. For top-income earners, 3.8 p.c Medicare tax is due on earnings over your specific earnings threshold based mostly in your submitting standing—that’s an extra 0.9 p.c.
Who’s required to pay SE tax?
Listed below are some examples of who must pay SE tax:
• Sole proprietors of a enterprise or commerce
• Unbiased contractors and freelancers
• Members of a partnership of a commerce or enterprise
Even if you’re historically employed and earn self-employment earnings on the facet, you’re nonetheless possible required to pay SE tax in your facet hustle earnings.
Steps to calculate self-employment tax
Able to calculate how a lot self-employment tax you could possibly owe this yr? Let’s dive in. For added help, you may also try our self-employment tax calculator.
Step 1: Calculate how a lot of your web earnings is taxable.
To do that, multiply your complete self-employment web earnings by 92.3 p.c (0.9235). That is the proportion of your earnings that the IRS says is taxable.
For instance, if you happen to earned $100,000 in self-employment earnings in the course of the yr, you’ll multiply that quantity by 0.9235 to find out that your taxable web earnings is $92,350.
Step 2: Calculate the quantity you owe for self-employment taxes.
To take action, you multiply your complete self-employed taxable earnings by 15.3 p.c (0.153). Bear in mind, the 15.3 p.c is the mixed share for Social Safety and Medicare taxes.
Persevering with the instance above, you’ll take the primary quantity you bought when figuring out your web taxable earnings ($92,350) and multiply it by 0.153. On this occasion, the overall SE tax owed can be $14,129.55.
Step 3: Report half of your self-employment tax as an adjustment to earnings in your tax return (Kind 1040).
Your complete SE tax is reported on Kind 1040 within the “Different Taxes” part. You possibly can declare 50 p.c of self-employment tax owed as a tax deduction. This reduces your adjusted gross earnings (AGI) and the quantity of earnings tax you owe.
Following our earlier instance, you’d take the quantity you bought in step two ($14,129.55) and multiply it by 50 p.c (0.5). On this occasion, your reported adjustment to earnings can be $7,064.78.
Essential takeaways
Whether or not you run a bakeshop on the weekends, writer weblog posts as a contract author, or design logos for native companies, it’s good to understand how the SE tax impacts your cash. And if you happen to’re nonetheless uncertain about SE taxes, our self-employed tax software program is right here to make issues simpler for you.
