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.