The self-employment tax is calculated as a percentage of your net self-employment earnings. In 2014, the self-employment tax amounts to 15.3 percent of net earnings and consists of two parts:
- 12.4 percent for Social Security
- 2.9 percent for Medicare
Before you can figure your self-employment tax, you need to calculate your net self-employment earnings for the tax year. In most cases, net earnings are the same as net profit from self-employment. Net profit is calculated using income tax form Schedule C: Profit or Loss from Business. Net profit is the difference between gross income and any deductible business expenses. If your net profit is at least $400, you need to pay self-employment tax.
The instructions for calculating the self-employment tax are found on IRS form Schedule SE: Self-Employment Tax:
- Refer to your Schedule C (or Schedule Cs if you have multiple small businesses) and enter the total amount of net profit (if less than $400, stop).
- Multiply that amount by 92.35 percent (you are not taxed on your full earnings).
- For earnings less than $117,000, multiply the amount by 15.3 percent.
- If you earned more than $117,000, multiply the amount by 2.9 percent then add $14,508 to the result. The tax code caps taxable Social Security earnings at $117,000, but Medicare taxes apply to all earnings
Here's some good news. The IRS gives self-employed workers a tax break to make up for the fact that employed people only pay half of their FICA contributions (their employers cover the other half). The IRS let's self-employed individuals deduct half of the cost of the self-employment tax from their taxable income. The calculation is simple:
- Multiply your self-employment tax by .50
- Enter that figure on line 27 of form 1040 in the section labeled "Adjusted Gross Income"
Now that you've calculated how much you owe in self-employment tax, there's only one (sad) thing left to do: pay it. Keep reading to learn about estimated taxes.