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How the Self-employment Tax Works

        Money | Taxes

How to Calculate Self-employment Tax

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:

  1. 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).
  2. Multiply that amount by 92.35 percent (you are not taxed on your full earnings).
  3. For earnings less than $117,000, multiply the amount by 15.3 percent.
  4. 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:

  1. Multiply your self-employment tax by .50
  2. 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.