When you’re an employee for a company, paying your income taxes is relatively straightforward; the majority of what you owe is pulled directly from your paycheck, and you don’t have to pay too much attention to the issue until it’s tax season. However, if you’re self-employed worker or independent contractor, your taxes can quickly get a lot more complicated due to self-employment taxes. What are self-employment taxes, how much will they cost you, and how do you pay them? Keep reading to find out more.

What Are Self-Employment Taxes?

Self-employed workers who are filing their taxes for the first time often feel a bit of sticker shock when they’re hit with the self-employment tax. It might feel like an additional tax, but in reality, it’s a delayed tax that would have come out of a standard paycheck much sooner. If you’ve ever looked at a standard paycheck, you’ll see that there are several deductions made from the gross income you earned. These include income tax, as well as Social Security and Medicare taxes. These last two items, when paid post-income, are known as self-employment taxes.

For most independent contractors, however, your income is not taxed upfront like a paycheck. This means that you’ll have to pay those taxes after you’ve received your income, rather than before. So, even though the name can be a bit deceptive, self-employment taxes are actually not an additional tax levied against self-employed workers; they’re simply the taxes that you would have had taken directly out of your paycheck.

Who Has to Pay Self-Employment Taxes?

Independent contractors and businesses with net earnings of $400 or more in a year must pay the self-employment tax. There are some exceptions to that based on your business structure, but we recommend discussing those particulars with your CPA. If you have not yet selected a business structure for your company, contact us for help with finding the right structure for your company’s unique tax situation.

How Much Is the Self-Employment Tax?

The current self-employment tax rate is 15.3% of your annual income. This includes 12.4% for Social Security and 2.9% for Medicare. Generally speaking, the percentage attributed to Medicare will be applied to all of your net self-employed income, while the Social Security portion will only apply to the first $147,000 of your income. Please note that these are the amounts for 2022, and are subject to change. Certain exemptions do apply, so contact one of our CPAs to discuss whether or not you might be exempt from any portion of the self-employment tax.

An additional Medicare tax can also be applied to self-employment income above a certain threshold. Currently, an additional Medicare tax rate of 0.9% applies if you earn more than the amounts listed below:

  • $250,000 for married couples filing jointly
  • $125,000 for married couples filing separately
  • $200,000 for single filers and heads of households

So, if you are a self-employed individual earning $300,000 a year from your business, a Medicare tax rate of 2.9% would apply to your first $200,000 of income, while the additional Medicare tax would apply a rate of 3.8% to the next $100,000 of your income.

Are Your Self-Employment Taxes Deductible?

Though you might wince at the amount you have to pay in self-employment taxes, the good news is that half of that amount is deductible on your income taxes. You can claim this deduction on Form 1040, Schedule 1. However, please note that this deduction only impacts your taxable income for income taxes; it does not alter your net earnings from self-employment or the result self-employment tax amounts.

When Do You Pay Them?

If your income is not being taxed upfront, then you are generally expected to make estimated quarterly tax payments to the IRS. The US tax system operates on a pay-as-you-earn basis. Because self-employed income is not taxed when it is earned, you should plan to make periodic payments during the course of the year. To do so, you’ll need to estimate your income for the coming year and make quarterly payments based on that estimate. If you don’t, you could end up facing fines for underpayment when you file your tax return.

If you’re self-employed or an independent contractor, and you have questions about the self-employment tax or concerns about filing your taxes, contact Peter Witts CPA today. We specialize in working with contractors and self-employed individuals, so we can help you to more easily navigate the tax complexities that come with being your own boss. Call now to schedule a consultation with one of our experienced CPAs.