Individuals with $400 or more of net earnings from self-employment must pay self-employment tax, in addition to any income tax imposed on the same income. This article can help you estimate any self-employment tax liability that you may owe.
The self-employment tax consists of two taxes: a tax used to fund Social Security benefits and a tax used to fund Medicare benefits. The Social Security tax rate is 12.4 percent, and the Medicare tax rate is 2.9 percent. The combined tax rate is 15.3 percent.
The first $113,700 (for 2013) of net income from self-employment (reduced by any wages received by the individual) is subject to a 15.3 percent tax (which includes the Social Security and Medicare health insurance taxes). Income above that amount is only subject to a 2.9 percent Medicare tax. Taxpayers use Schedule C or C-EZ (Form 1040) to figure net earnings from self-employment (self-employment income). Schedule SE (Form 1040) is used to figure and report self-employment taxes.
Calculating self-employment tax liability
Step 1. Determine your net income from self-employment (from Schedule C or C-EZ for sole proprietors; from Schedule E, Part II for self-employed businesses treated as a partnership; or Schedule F for farmers). Generally, net income is your total business receipts minus your total business deductions.
Step 2. Multiply your net income from self-employment by 0.9235. This is your net earnings from self-employment. If this number is less than $400, you do not owe self-employment tax.
Step 3. Multiply by 0.153 the amount of your net earnings up to an amount equal to $113,700 reduced by any wages received (for which there has already been withholding). Additionally, if applicable, multiply any net earnings over $113,700 by 0.029. Add these two numbers together. This is your estimated self-employment tax liability.
Step 4. Report your self-employment tax liability on Schedule SE of Form 1040.