How to calculate self employment taxes
Self-employment taxes are the employment taxes for someone who is self-employed. They are separate from your state and federal taxes.
If you want a quick answer, check line 12 on schedule SE. Continue reading if you want to understand how self-employment taxes work.
Full Video Transcript: How to calculate self employment taxes
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In this video, we're going to talk about how to calculate your self-employment tax. But before we do that, your first time at our channel or you haven't subscribed. Click on the subscribe button at the bottom My name is Travis Sickle, Certified Financial Planner, helping you reach your financial goals So self-employment tax is your payroll tax, also known as FICA taxes which is your Federal Insurance Contributions Act.
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And these are the payments, the payroll payments, that you're making to pay for Social Security and Medicare. Now, they can further be broken down into the employer side and the employee side. So as somebody who is self-employed, you're going to pay both side because you're both the employee and the employer. Now, before we do the calculation, I want to break it down just so you can see how all the numbers add up.
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So we're going to start with Social Security and Medicare. So the Social Security side is going to be 6.2% for the employee, and then it's going to be 6.2% for the employer. And then on the Medicare side, it's going to be 1.45% for the employee. And then 1.45% for the employer. Now, if we add up the Social Security, that's going to equal 12.4%.
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And then if we add up the Medicare side, that's going to be 2.9%, which if we add these two numbers up 12.4% plus the 2.9%, that is going to equal 15.3%. And if we further add these two and these two, that's going to be 7.65% for the employee. And then 7.65% for the employer, which equals our 15.3%.
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So this will be for our employer and this will be for our employee. Now, before we get into the actual calculation and multiply it out to figure out what our self-employment taxes are, we need to understand two terms One is called net profit, and the other one is net earnings from self-employment. Now, there's a slight difference in the two, but if you use the wrong number, you're going to get the wrong answer.
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So you can find your net profit on your schedule. We'll see for profit and loss from your business and online, seven for 2019, you're going to see your gross income for this example. We're going to use $100,000. Now, you can see in part two year expenses. I didn't put any expenses here, but this will be subtracted from your gross income and on line 31 of your schedule C is where you're going to find your net profit.
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And this is the number that we're going to put on our self-employment tax or our Schedule C So let me go ahead and pull that up. This is where we're going to do the calculations for our self-employment tax and what you can see here is that we put our net profit online to our profit or loss, and we put in $100,000 that you can't simply multiply your figure rate, which is 15.3% multiplied by your net profit.
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You actually need to take it a step further so what you need to do is you need to multiply it by 92.35%, which is what you can see online for. And that's where we get the 92,350. Now the reason we do that is because what we're doing is subtracting one half of the rate of our self-employment. So just to show you on paper, if we take 100 and we subtract 7.65, we're going to get nine to three 5%.
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So it's 92.35%. Now, if we were to write this out, it would be point nine to 35 and that's what you would enter on the calculator. And in this example are 92,350 is our net earnings from self-employment. And as you can see on this Schedule C for self-employment tax, if your income is below $132,900 or less, then you could just multiply it by that rate of 15.3%.
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And that's exactly what we did. If we multiply the $92,350 by 15.3%, that's where we get the $14,130. Now one half of that or the deductible portion is $7,065. And the reason that you see the 132,900 or less multiplied by line four, which is our net earnings from self-employment multiplied by 15.3%, is because the hundred and $32,900 is the maximum amount that will be applied for the Social Security.
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The Medicare side doesn't have a limit, so that gets applied no matter how much money you earn. And that's why you see the adjustment of more than $132,900 multiplied by 2.9%, which is the Medicare side. Then you just add the additional $16,479.60. And the reason they broke it down here, where it's just adding the $16,479.60 is because if you take 12.4% and multiply it by that Social Security max of $130,900, that's how you get to 16,004 7960.
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And if you earn even more money there's an additional Medicare tax of point nine of 1% additional. But those have income thresholds and those income thresholds, if you're married filing jointly is 250,000 and above if you're married filing separately it's 125,000 and above. And if you're single head of household or a qualifying widower, it's 200,000 and above. So to avoid making a mistake, paying too much in taxes or just being confused about your self-employment taxes, it's important to remember that it's based on your net earnings from self-employment and not your net profit.
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And that is how you calculate your self-employment tax. If you've enjoyed this video, be sure to subscribe and leave your comments down at the bottom.
What are Self-Employment Taxes?
Self-employment taxes are your social security and medicare tax on your self-employed earned income. FICA taxes, (Federal Insurance Contributions Act) are also social security and medicare taxes but from employment earned income, think W-2 wages.
They are the same thing. However, you pay both the employee and employer side of these taxes when you are self-employed.
The tax has two parts, Social Security and Medicare, which total 15.3% and are further broken down into the employer and the employee side.
Social Security makes up 12.4% of self-employment tax which is 6.2% for the employee and an additional 6.2% for the employer. While medicare is 2.9% of self-employment taxes, with 1.45% for the employee and 1.45% for the employer.
When adding up each side of self-employment taxes you will get 7.65% for both the employer and employee. 6.2% + 1.45% = 7.65%
Finally, if you add both the employer and employee sides, that is a total of 15.3%. 7.65% + 7.65% = 15.3%
How to calculate self-employment taxes fast
You can calculate your self-employment tax quickly if you're under the social security maximum of $147,000 for 2022. Otherwise, skip to the next section on "How to calculate self-employment taxes with tax forms," for a complete self-employment tax walkthrough.
Step 1. Multiply your net income from self-employment by .9235
Step 2. Multiply Step 1 by 15.3%
Step 3. Multiply step 2 by 50%
Social Security has an income limit but Medicare is taxed on all earned income. It's 2.9% plus an additional medicare tax of 0.9% on income over certain limits depending on your filing status.
Medicare Tax and Additional Medicare tax
The Medicare tax side doesn't have a limit, so that gets applied no matter how much money you earn.
If you earn more than certain income limits depending on your filing status, you will owe an additional 0.9% in additional medicare tax.
- $250,000 for married filing jointly;
- $125,000 for married filing separately; and
- $200,000 for all other taxpayers.
Social Security Tax Limits
Social security is only calculated up to certain income limits. The income limits do not depend on your filing status.
| Year | Social Security Income Limits |
|---|---|
| 2015 | $118,500 |
| 2016 | $118,500 |
| 2017 | $127,200 |
| 2018 | $128,400 |
| 2019 | $132,900 |
| 2020 | $137,700 |
| 2021 | $142,800 |
| 2022 | $147,000 |
How to calculate self-employment taxes with tax forms
Calculating your self-employment taxes is based on your net profit. If you're a sole proprietor or single-member LLC not filing as an S-Corporation, you can find your net profit on Schedule C. Members of a partnership can check line 14 on Schedule K-1 of form 1065.
First, find your net profit using one of the two methods below. Then continue to Schedule SE, to calculate your total self-employment tax.
Schedule C line 31
You can find your net profit on Schedule C, line 31. Your net profit minus 1/2 of your self-employment tax will be the number used to determine your total self-employment taxes.
To avoid double taxing your taxes, you subtract 1/2 of self-employment taxes from the net profit. It's also called the deductible portion of self-employment.
Partnership K-1 Line 14
If you are a member of a partnership, you can find your net profit from self-employment on Schedule K-1 of Form 1065, line 14.
Schedule SE for Self-Employment Taxes
Schedule SE has been updated since the video and you can find all the same numbers to calculate your self-employment taxes. You can find your self-employment taxes on line 12 and the deduction for 1/2 of self-employment on line 13.
Here is a walkthrough of the form that will work for most filers.
Line 2: Insert your net profit from Schedule C line 31 or Schedule K-1 line 14
Line 3: Insert the same amount from line 2. (We're skipping farmers, sorry farmers)
Line 4a: Multiply line 3 by 92.35%, which is your net income minus 1/2 of your self-employment.
If you're not using an option method and don't have Church income you can skip down to Line 6.
Line 4b: If you elect one or both of the optional methods, enter the total of lines 15 and 17.
Line 4c: Combine lines 4a and 4b. If less than $400, stop; you don’t owe self-employment tax. Exception: If less than $400 and you had church employee income, enter -0- and continue
Line 5a: Enter your church employee income from Form W-2.
Line 5b: Multiply line 5a by 92.35% (0.9235). If less than $100, enter -0-.
Line 6: Add lines 4c and 5b. If you skipped the above, enter the number from line 4a.
Line 7 This is the maximum social security income limit.
Lines 8a-c Are your employment wages, not your self-employment income.
Line 8d: Add up all your employment wages. (Again, not your self-employment income)
Lines 9-10: These lines calculate your social security tax.
Line 11: These lines calculate your medicare tax.
Line 12: This is the total amount of your self-employment tax.
Line 13 The deduction for one-half of self-employment tax. Multiply line 12 by .50 or 50%.
How can I reduce my Self-Employment Taxes?
I thought you would never ask! It may be possible to reduce your self-employment taxes depending on your business structure. It doesn't always make sense to convert from a sole proprietorship, LLC or partnership to an S-corporation but in some instances, you can control and reduce your self-employment taxes within reason.
While this is the end of this post on self-employment taxes, read up on distributions with an S-corporation.