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How Self-Employment Taxes Work

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.)

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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