Self-employed workers, including gig workers, are subject to federal taxes as well as a 15.3% self-employment tax on net earnings above $400. This includes individuals driving for Uber or Lyft, delivering food or groceries, or selling goods online. Taxpayers can lower the self-employment tax they owe by claiming relevant business expenses.
Overview of self-employment tax
If you own a small business or have a side hustle that generates income, you’re likely to be classified as self-employed or as an independent contractor by the IRS. The self-employment tax is a Social Security and Medicare tax that helps pay for old-age benefits. Unlike traditional employees who split the cost of this payroll tax with their employer, self-employed individuals are responsible for paying the full amount themselves.
Self-employment tax rates
Self-employed taxpayers are subject to a 15.3% self-employment tax on net earnings, or profit. This tax includes a 12.4% Social Security tax and a 2.9% Medicare tax. The Social Security tax is only assessed on the first $168,600 of net earnings in 2024, while the Medicare tax applies to all net earnings. Single filers with net earnings over $200,000 and married joint filers with combined earned income over $250,000 may be subject to an additional Medicare tax of 0.9%.
Filing self-employment taxes
Businesses that paid you for work may send forms to the IRS to report those payments, such as the 1099-NEC or 1099-K. If you don’t receive these forms, you’ll need to rely on your own payment records to report all net income earned on Schedule C of your tax return. The self-employment tax is calculated on Schedule SE.
Estimated tax payments
Self-employed workers are required to pay taxes throughout the year, just like traditional employees. Quarterly tax payments are due in April, June, September, and January. You can avoid paying estimated taxes if you have your withholdings increased to cover your freelance income or if you meet certain conditions outlined by the IRS.
Self-employment tax deductions
Self-employed workers can reduce the amount of taxes they owe by claiming relevant business expenses as deductions. These expenses must be considered “ordinary and necessary” for the trade or business. Deductions can include insurance, state and local taxes, interest on loans, travel, and office supplies.
Calculating your self-employment tax
Calculating self-employment tax requires estimating your net earnings for the year and following specific steps to determine the amount owed. If you need help with the calculation or have questions about the requirements for paying the self-employment tax, consider hiring a tax professional.
In conclusion, self-employed individuals are responsible for paying self-employment tax on their net earnings. By understanding the tax rates, deductions, and payment deadlines, self-employed workers can effectively manage their tax obligations and reduce the amount of tax owed. It’s important to stay informed about tax laws and regulations to ensure compliance and avoid penalties.
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