Unlike typical employees, self-employed Americans have the responsibility to keep track of and pay self-employment taxes, including Social Security and Medicare, on the income they receive through self-employment activities. In this article, you will learn relevant tax information for self-employed individuals.

What Are Self-Employment Tax Rates?

Self-employment tax rates are 15.3% of all taxable income and self-employment income. This rate is calculated based on the revenue from your self-employment activities minus any business expenses that are considered allowable.

What Is Not Included in Self-Employment Tax?

Self-employment taxes are not calculated on income earned from your primary job (a job for which you receive payment from an employer and for which you are taxed at your regular tax rate). Examples of excluded income include:

• Wages and salaries

• Payouts from a pension or retirement plan

• Payment from a company-sponsored retirement plan

• Earnings from investments and interest

• Income from rental property

What Are Self-Employment Tax Deductions?

Self-employed tax deductions may be claimed to reduce the amount of self-employment taxes that you must pay. These may be claimed for these expenses, and there are special tax deductions for the self-employed that can be claimed for costs associated with your work, such as:

• Business travel expenses

• Qualified retirement plan or IRA contributions

• Business-related education expenses

• Business equipment and supplies

• Professional association dues

• Advertising costs

• Occupancy expenses

• Home office expenses

• Repayment of business loans

• Fees associated with your company car

Self-employed taxpayers seeking additional tax deductions should consult with a tax professional or check out the IRS Business Expenses webpage.

Why Does One Have to Pay Self-Employment Taxes?

Self-employment taxes are a method for self-employed taxpayers to receive Social Security and Medicare benefits in retirement. While self-employment income is not taxed at an individual's regular tax rate, self-employment taxes are. The net income from self-employment income determines the self-employment tax rate.

How Does One Pay Self-Employment Taxes?

Self-employment tax returns must be filed annually, even if no taxes are owed. Self-employed taxpayers who are required to file a federal income tax return must also file a Schedule SE with their return.

Self-employed taxpayers are allowed to deduct the employer's share of Social Security and Medicare taxes from their income when calculating the self-employment tax. To avoid penalties, one must make self-employment tax returns and payments by April 15.

What Else Does One Need to Know About Self-Employed Taxes?

Though self-employment taxes are calculated differently than regular income taxes, self-employed taxpayers must still pay Social Security and Medicare taxes on their income, even if they are not currently taking Social Security benefits. 

Self-employed taxpayers should review their self-employment taxes each year and make any necessary adjustments to ensure that they pay the correct amount of self-employment taxes to the IRS and receive the correct amount of Social Security and Medicare benefits.

How Are Self-Employment Taxes Calculated?

Determine your taxable self-employment income. Take the income you earned from your self-employed activity and subtract any expenses that may be deducted from Schedule C. 

Calculate self-employment tax. Once you have calculated your taxable self-employment income, self-employment tax will be calculated using the following formula: 15.3% x taxable self-employment income.

Conclusion

Self-employment taxes are an essential part of being self-employed and earning income. All self-employed taxpayers must pay self-employment tax on their income. This tax is calculated differently than other taxes and may be subject to different tax rates.

If you need the help of an accountant in Denver, turn to Tottax. We are a tax and accounting agency that helps small businesses solve issues associated with tax and accounting. Schedule a consultation today.