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What is Self-Employment Tax? Why You Need to Pay it

The logic is simple: if you're self-employed, then you need to pay self-employment tax. But how much? Can you write off your expenses? Is there any relief that you can get while paying taxes as a self-employed individual. Read on to find out.

self-employment tax
This article explains everything you need to know about self-employment tax or SECA which is the federal government's tax for self-employed individuals.

In this article

Are you an independent contractor, a small-business owner or a freelancer? Then you might need to pay self-employment tax. Read on to know what self-employment tax is, how it works and how you can save on self-employment tax with tax write-offs.

Self-Employment Tax 101

In 1935, the federal government passed the Federal Insurance Contribution Act (FICA). This established taxes to fund public social security and healthcare. The FICA tax is 15.3%, and the burden of this tax is split between employers and employees so both pay 7.65% each of the total 15.3% tax.

To ensure that self-employed individuals also contribute toward Social Security and Medicare, the federal government passed the Self-Employed Contributions Act (SECA) in 1954. It mandates self-employed individuals to pay the entire 15.3% FICA on their own. This rate includes 12.4% for Social Security and 2.9% for Medicare. 

As it is paid by self-employed individuals, it is commonly known as the self-employment tax. The SECA tax is required to be paid on a quarterly basis throughout the year.

Who Has to Pay Self-Employment Tax?

In general, every self-employed individual who has earned at least $400 or more in net earnings in the previous financial year has to pay this tax. However, if their employer withheld payroll taxes, then they do not have to pay self-employment tax on income earned from the employer. According to IRS, you are officially self-employed if you received a 1099 form from the entity you worked for. 

One is also liable to pay self-employment tax if they had $108.28 or more in income from church employment. They need to pay even if they are a US citizen employed by a foreign government. These tax rules apply irrespective of one’s age and even if one is receiving Social Security or is on Medicare.

How to Calculate and Pay it

Calculating your self-employment tax starts with assessing your net earnings in the year. Net earnings are your gross income from self-employment after deducting your business expenses. Once you have determined your net earnings sum that is subject to tax, you apply the 15.3% tax rate on it and that is your payable tax.

Be sure to check out the IRS Schedule C to calculate your net earnings from self-employment and Schedule SE to calculate how much tax you owe. For 2022, only the first $147,000 ($160,200 in 2023) of earnings is subject to the Social Security portion of the self-employment tax.

You will need to provide your Social Security number (SSN) or individual taxpayer identification number (ITIN) at the time of paying the tax on the IRS portal.

Don’t wait until the annual tax-filing deadline to pay your taxes or you may incur late-payment penalties. Instead, you may need to make quarterly estimated tax payments throughout the year on the basis of your prospective income.

Tax Deductions for Self Employment

Self employment can get you a bunch of tax deductions. One is the qualified business income deduction. This lets you take an income tax deduction for as much as 20% of your net income. Additionally,  you can avail other deductions for your home office, health insurance and more.

As a self-employed person, now you know what federal taxes and deductions you are eligible for. If you are still unsure about anything regarding self-employment tax and how to file for one, then visit the IRS website or consult a professional.

This page is purely informational. Line does not provide financial, legal or accounting advice. This article has been prepared for informational purposes only. It is not intended to provide financial, legal or accounting advice and should not be relied on for the same. Please consult your own financial, legal and accounting advisors before engaging in any transactions.

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