Hi everyone, I’m Cindy, the Tax Manager here at Bette Hochberger, CPA, CGMA. Embarking on a journey as a self-employed business owner brings with it not only the thrill of independence but also a new set of responsibilities. 

Among these is the self-employment tax. While the thought of additional tax obligations might seem a bit troubling, understanding and managing your self-employment taxes can be straightforward with the right information.

What is Self-Employment Tax?

Self-employment tax is a government-mandated tax that self-employed individuals must pay. It contributes to your coverage under the social security and Medicare systems. This tax is similar to the social security and Medicare taxes withheld from the pay of most wage earners.

Who Needs to Pay It?

If you are an independent contractor, a freelancer, or running your own business, you typically need to pay self-employment tax as you are considered self-employed. This applies to you if your net earnings from self-employment were $400 or more.

Calculating Your Self-Employment Tax

To calculate your self-employment tax, you need to determine your net earnings from self-employment. This involves subtracting your business expenses from your business income. The self-employment tax rate consists of two parts: 12.4% for social security and 2.9% for Medicare. For 2024, the social security portion of the tax applies to the first $147,000 of your combined wages, tips, and net earnings.

Filing and Paying Your Self-Employment Tax

As a self-employed individual, you will report your self-employment income and calculate your self-employment tax using Schedule SE, which is part of the IRS Form 1040. It’s crucial to pay your taxes throughout the year, which can be done using estimated tax payments. If you don’t make these payments, you may be subject to penalties.

Tips for Managing Self-Employment Tax

  1. Keep Accurate Records: Maintain detailed records of your income and expenses.
  2. Understand Deductions: Certain expenses can be deducted, which reduces your taxable income.
  3. Make Quarterly Estimated Tax Payments: To avoid penalties, make regular payments throughout the year.
  4. Seek Professional Advice: Consider consulting with a tax professional for personalized advice and to ensure compliance.

Navigating the waters of self-employment tax doesn’t have to be a stressful experience. By understanding what it is, who it applies to, and how to calculate and pay it, you can ensure that you stay on top of this important obligation. 

Remember, paying self-employment tax is not just a responsibility but also a contribution to your future social security and Medicare benefits!

I’ll see you all again next time.