Are you self-employed and wonder how much of the dreaded self-employment (SE) tax you’ll be required to pay this year? Read on to get the answer.<\/p>\n
Generally speaking, the SE tax rate is about 15.3% of your self-employment profit. The self-employment tax is calculated on Schedule SE, which is included on your personal income tax return along with Schedule C.<\/p>\n
In case you’re thinking, “Wow, that’s a lot of self-employment tax”, you are right. It’s about twice as much as you would pay if you made that income as an employee instead of as a self-employed person. Employees pay only 7.65% of their gross wages in Social Security and Medicare taxes, which are the equivalent of the self-employment tax. Their employers also pay 7.65% as a match, so the total is the same 15.3% that a self-employed person pays; but again, the employee ends up paying about half what you pay.<\/p>\n
Does that seem fair? Probably not. But it’s the way our system has treated this issue for many years, so you might as well get used to it. Now you know why we call it the “dreaded” SE tax.<\/p>\n
And you can also see why it is so important to include SE tax in your estimates of federal tax liability for the year. This is especially critical if you are required to make quarterly estimated tax payments via Form 1040-ES. If you forget the SE tax, you will probably come up short and have a large balance due on your income tax return due April 15. Believe me, many newly self-employed folks have had a rude awakening when they realize they didn’t account for SE tax until they prepared their income tax return. You shouldn’t have that problem, though, because you’ve been warned.<\/p>\n
One final comment that barely qualifies as “good news” regarding the dreaded SE tax \u2013 your actual rate will always be slightly less than 15.3%, because you get to take a deduction from gross income for one-half of the SE tax on your federal income tax return. Even a slight reduction is better than no reduction, right?<\/p>\n","protected":false},"excerpt":{"rendered":"
Are you self-employed and wonder how much of the dreaded self-employment (SE) tax you’ll be required to pay this year? Read on to get the answer. Generally speaking, the SE tax rate is about 15.3% of your self-employment profit. The … Continue reading