Taxation is one of the most confusing aspects of a small business. From sales tax to payroll taxes, this portion of running a business frustrates a lot of entrepreneurs and owners. As part of our continued content about small business taxes, we explain the self-employment tax and what you can do to understand and manage your tax burden.
Below we define the self-employment (SE) tax, your self-employment contribution rate and the self-employment threshold for 2018, how to calculate the self-employment tax, and what you need to do for 2018.
Defining the Self-Employment tax and Form 1040-ES
You are required to contribute your share of Social Security and Medicare even if you work for yourself. The SE tax that you contribute is like the tax that is withheld from an employee’s paycheck each pay period. It is important to note that the SE tax does not include any other taxes that you might owe. It only refers to Social Security and Medicare.
Because you are self-employed, you may need to file estimated quarterly tax payments. Form 1040-ES is a resource that provides information on how and when to file estimated taxes as well as worksheets to help you calculate the payments.
How to calculate your Self-Employment tax
The total SE tax contribution rate is 15.3 percent of your net self-employment income. The rate breaks down into two portions as stated above. Social Security represents 12.4 percent and Medicare is 2.9 percent.
To calculate your SE tax, you multiply the SE tax rate (15.3 percent) by your net self-employment income. An example scenario could be as follows. If your self-employment income is $125,000 for 2018, your SE tax would be $15,500 for Social Security and $3,625 for Medicare. Your total SE tax would be $19,125.
Maximum Self-Employment tax threshold for 2018
The Social Security portion of the tax is applied to your first $128,400 of wages, tips, and net earnings in 2018. This is an increase of $1,200 from 2017. If you need to know prior year thresholds, refer to the IRS’s Schedule SE for earlier years.
Self-Employment tax deduction from gross income
The Social Security and Medicare tax is paid by all businesses on employee wages. The employer pays half (7.65%) and the employee pays the other half (7.65%). If you are self-employed, you are considered both the employer and employee when this tax is due. Not very fair, is it?
To support the development of small business, the government allows you to deduct the employer portion of the SE tax from your total income. This means that you can deduct 6.2% for Social Security and 1.45% for Medicare (totaling 7.65%). This deduction only affects your INCOME TAX. It does not affect your net earnings or total SE tax.
Your next steps
- Locate your Social Security number (SSN) or your individual taxpayer identification number (ITIN) to pay your SE tax. You can expect to pay SE tax if you have any self-employment income such as business income from a sole proprietorship. You are required to pay SE tax if your net earnings are $400 or more, or you have a church employee income of $108.28 or more.
- Estimate what your net self-employment income is each quarter, so you can pay the SE tax that is due. Look at your federal tax return from last year as a guide or look at Form 1040-ES for help. You need your estimates to be as accurate as possible, so you pay the required SE tax portion each quarter.
- Calculate each quarter’s SE tax total and know when each quarterly estimate is due. Refer to the updated 1040-ES instructions each year to confirm due dates for your payments
Need assistance with your self-employment tax? We can help! We do not want you to face any penalties, so if you have any questions about the SE tax or what you might owe for each quarter, contact Gift CPAs. Our experts can help guide you through the process of calculating your totals.