Self-Employment Tax: What is it, And How is it Calculated? 2020

What is it?

A self-employment tax of 15.3% is imposed on anyone who has $400.00 or more in net earnings from self-employment transactions. If you receive a Form 1099, you are more than likely seen as self-employed in the eyes of the IRS.

The self-employment rate of 15.3% is broken into two rates. See below:

Medicare 2.9%

Social Security 12.4%

FYI: W-2 employees also pay Medicare and Social Security taxes through payroll withholdings. The difference is that the employer pays half of the tax. That leaves the W-2 Employee liable for only 7.65%. I other words, IT COSTS TO BE THE BOSS!

What you need to know for year 2020

·       For 2020, the first $137,700 of earnings is subject to the Social Security Portion compared to the $132,900 threshold from 2019.

·       If your net earnings are above $200,000 for single filers or $250,000 for those who file jointly, an additional 0.9% Medicare tax may apply.

How to Calculate it

STEP ONE: Calculate net earnings. Do this by subtracting your business expenses from your gross income. (Net Income – Business Expenses = Net Earnings)

STEP TWO: Calculate how much of your net earnings are subject to tax. Do this by multiplying your net earnings by 92.35%. (Net Earnings x .9235= Taxable Income Subject to Self-Employment Tax)

STEP THREE: Calculate what you owe in Self-Employment Taxes. Do this by multiplying your Taxable Income Subject to Self-Employment Tax by the Self-Employment Tax rate of 15.3%. (Taxable Income Subject to Self-Employment Tax x .153= Tax Liability)

The Silver Lining:

Self Employed Taxpayers may deduct half of their self-employment tax on their income taxes. This means that whatever your Schedule SE says you owe; you will have to pay when it is due during the year. At the end of the year, you will be able to deduct half on your Form 1040.

Previous
Previous

What is a Credit Score and How is it Calculated?