(This post was written by Mariette Knoblauch.)
Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners.
You figure SE tax using Schedule SE (Form 1040). Social security and Medicare taxes of most wage earners are figured by their employers. You can deduct half of your SE tax in figuring your adjusted gross income. Wage earners do not deduct social security and Medicare taxes when calculating adjusted gross income.
SE tax rate
The self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).
Maximum earnings subject to SE tax
There is a limit on total wages, tips, and net earnings subject to the 12.4% social security part of SE tax. The limit changes each year and the current amount can be found on the IRS website.
All your combined wages and net earnings are subject to the 2.9% Medicare part of SE tax.
Income tax is a different tax in that it is calculated based on your taxable income, not based on wages and net business earnings. There are several deductions and exemptions that are allowed as well as some additions to income that must be made when calculating income tax. For example taxable interest and dividends, capital gains and net rental income are all added to your earnings in calculating taxable income.
SE tax and income tax are similar because you are required to estimate and prepay both of the taxes during the year. Estimated tax payments are due on April 15, June 15, September 15 and January 15. You use IRS Form 1040-ES to make the payments.
If you fail to prepay a sufficient amount of SE and income tax during the year you may be subject to penalties and interest on the amount that is under paid. You can avoid the penalties and interest under what are known as “safe harbor provisions”. No penalties will be charged if you paid estimated payments of at least 90% of what your final total taxes are or you paid the same amount as you actually owed from last year.
Still confused about taxes? Head over to Outright’s Tax Resource Center for our updated Online Seller’s Guide to Filing Taxes.