Self-Employment Tax: What It Is And How To Calculate It For The 2021-22 Tax Season
Sarah Li Cain9-minute read
July 13, 2022
Tax season is upon us, and as a self-employed person, filing taxes can be more cumbersome than someone who works for a larger company. Although it takes a few more steps to get it right, filing self-employment tax can be a fairly straightforward process.
Let’s dive deeper into self-employment tax and how to file it.
What Is Self-Employment Tax?
When you work full-time as an employee for a company, the payroll department typically handles the withholding of your income tax. Meaning, your employer deducts the Medicare and Social Security tax (known collectively as FICA – Federal Insurance Contributions Act) that you owe as a payroll deduction and sends it to the IRS.
When you’re self-employed you need to handle the employer portion yourself – whether you are a small-business owner, sole proprietor, a freelancer or an independent contractor. In addition, when you were an “employee,” the employer was obligated to pay half those taxes, but when you’re self-employed, you’re responsible for the entire amount.
Self-employment tax applies to anyone who made $600 or more, according to the IRS.
Who Pays Self-Employment Tax?
Someone who is self-employed earns their wages without a full-time employer — or having to fill out a W-2 Form. If you make $400 or more in net earnings per calendar year, you’ll need to file an income tax return and could be on the hook for taxes. Even if you make less than $400, you may still need to report this income. Consult a tax professional to determine whether this amount may be subjected to taxes.
Different forms of self-employment include:
- Gig worker (such as those who work for ride-share companies)
- Contract workers or freelancers
- Sole proprietors
- Small-business owner with certain business entities
In general, if you need to fill out a W9 for a client or company and receive a 1099-MISC or 1099-NEC come tax season, you’ll most likely need to pay self-employment tax.
Self-Employment Tax Rate For 2021-2022
Tax law can be complicated and can change frequently. According to the IRS, the current self-employed tax rate is 15.3%. This rate includes 12.4% for Social Security and 2.9% for Medicare.
In general, for 2021, the first $142,800 of your combined wages, tips and net earnings are subject to the Social Security part of self-employment tax, and will increase to $147,000 in 2022. You also may be subject to an additional Medicare tax of 0.9% if your net earnings from self-employment are more than $200,000 as a single filer or $250,000 if you’re filing as a married couple. You’ll want to refer to the IRS for any other income limits that might apply.
Another thing to note is that the Tax Cuts and Jobs Act (TCJA) of 2017 created a number of changes for small-business owners, most notably a potential 20% deduction of qualified business income for some small-business owners and types of business. For more details, you can refer to the chart the IRS created that offers guidance into some of the changes made.
Common Self-Employment Tax Deductions
Tax deductions are items you can subtract from your taxable income to lower the amount you may owe in taxes. It’s helpful for self-employed folks because you may be able to take advantage of more tax-deductible expenses compared to someone only working a full-time job. Doing so can lessen your taxable income, hence paying less to Uncle Sam.
Some typical self-employment tax deductions include:
- Earned income tax credit deduction: This refundable tax credit is for low- to moderate-income taxpayers who have eligible children who earn under a certain threshold.
- Home office deduction: As long as the room in your home is solely to be used for business purposes, you may be able to deduct it — your accountant can advise you here.
- Health insurance deduction: You may be able to deduct these premiums if you’re not on an employer-sponsored plan, such as the one from your spouse.
- Business insurance deduction: If you purchase a policy for your business such as liability or errors and omissions insurance, you can deduct this from your self-employment earnings.
- Business expense deductions: Some examples include advertising, internet, cell phone, office supplies and business travel-related expenses.
- Retirement deduction: Contributions made toward qualified plans (up to a certain limit) can reduce your taxable income.
- Education deduction: If you're pursuing a professional designation or other courses to update or learn new skills, you may be able to deduct them as long as you can prove they're to help you be better at your work.
How To File Self-Employment Taxes
In order to file (and eventually pay) your self-employment, you need to have a Social Security number (SSN) or individual taxpayer ID number (ITIN) — more on this below. Other documents you will need include any 1099-NEC or 1099-MISC forms, your record of self-employment income and qualifying deductions, and other applicable paperwork.
You will use Schedule C (Form 1040) to report your income or loss on your personal tax return.
It’s recommended that self-employed people make quarterly estimated tax payments. If you expect to owe $1,000 or more in taxes for the year, you should be paying quarterly. To calculate this amount, estimate how much you’ll earn in one calendar year (and your tax liability) and divide it by four. Working with a tax professional and referring to the IRS website can be a smart move to ensure you are doing everything correctly.
Obtaining A Social Security Number
A Social Security number is assigned to U.S. citizens and qualifying residents to track income, determine benefits and track individuals and their taxes.
Many small-business owners use this as their tax ID number. You can apply for a Social Security number by heading to your local Social Security Administration office or online at SSA.gov
Obtaining An Individual Taxpayer Identification Number
An individual taxpayer identification number (ITIN) is a number also issued by the IRS, but to non-resident aliens who aren’t eligible to receive a Social Security number but receive taxable income in the US. This number will also keep track of individuals and their taxes.
To apply for an ITIN, you'll need to fill out the IRS Form W-7 and provide the required forms of documentation.
How To Pay Self-Employment Taxes
You can pay your self-employment taxes online or by mailing. To pay your annual income taxes, you’ll need to fill out Form 1040 online and choose the method to pay. If paying online, your tax preparation software or accountant will give you instructions on how to access the IRS payment portal. Otherwise, you can fill out a paper voucher and mail it in with your payment.
Taxes filed with Schedule SE from the Form 1040 are due on Tax Day, generally around April 15.
Here are some possible scenarios that would force a self-employed worker to make quarterly payments:
- Owing at least $1,000 in federal income taxes
- Your withholding and refundable credits will cover less than 90% of your tax liability for the year or 100% of last year’s
For estimated taxes, you can also fill out a voucher available in Schedule SE (Form 1040-ES or 1040-SR) to mail in a payment, or pay online through the IRS website. You’ll need to indicate you’re paying estimated taxes for the relevant tax year.
You may be exempt from quarterly payments if you’re expected to owe less than $1,000 in federal taxes or earn less than $400 in a calendar year. It may also apply to those who receive income irregularly or were affected by unique circumstances such as a casualty or disaster. Depending on your situation, you may need to file Form 2210, though check with a tax professional to make sure.
The Bottom Line
Filling out your income tax return can always present a bit of a headache, and it can be even more challenging when you’re self-employed and don’t have someone taking out payroll taxes.
That’s why it’s smart to start early, gather all applicable paperwork for the tax year and educate yourself on the many ways you might be able to save through deductions and other grants and programs.
To help you with filing your taxes, consider these best tax filing options for 2022.
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