What Is Self-Employment Tax & How Often to Pay It?

Self-employment has many benefits. You can set your own hours. Choose your own job. Be your own boss! But it also comes with downsides---like figuring out how to pay self-employment tax.

Figuring out how to pay your self-employment taxes is a small price to pay for a fire department and working roads, but it can be difficult. Those who work the 9-5 can rely on the company to do the math for them.

When you’re self-employed, you’ve got to do it yourself, and the IRS is not interested in your excuses. But, don’t worry, we’re here to help.

A disclaimer

We’ll be repeating a lot of the same advice to you in this article. “Consult a tax professional.” The simple truth is that once you step outside a W-2, taxes can get very complicated, very fast.

We don’t mean to discourage you, we simply want to make sure you don’t end up on the wrong end of an IRS audit. If you’re ever uncertain, consult an expert, and not just an accountant, but one who is specifically a tax professional.

We are not tax professionals ourselves, so please take the following advice accordingly.

What is self-employment tax?

Now that we have THAT out of the way, let’s start at the beginning: What is the self-employment tax?

Essentially, it’s how the government collects payroll taxes on people who aren’t on someone else’s payroll. That’s what self-employment tax is. Your independent contractor tax rate you pay instead of payroll taxes.

See, the income taxes you pay every year AREN’T the only taxes the government collects on your income. There’s also payroll tax. A payroll tax is the money your employer withholds from your paycheck (or payroll) and sends to the government for you.

If you’ve ever gotten a tax refund? That’s the government deciding to give BACK some of the payroll tax you paid, often due to calculations that say you need the money due to being below a certain income level.

Of course, for this to work, you need to be on someone’s payroll. What if you’re a freelancer? What’s the independent contractor tax rate?  That’s what self-employment tax is for---to make sure you don’t get away without paying your fair share to the government.

We’ll get a little more in-depth into what the self-employment tax is used for later. For the time being, let’s focus on the important part. How much self-employment tax is.

Or to put it another way: what the federal self-employment tax rate is.

What is the federal self-employment tax rate?

There are two answers to the question “What is the federal self-employment tax rate,” - the simple one, and the complicated one.

The simple one is it’s 15.3% of net earnings. That is your total earnings minus any business expenses you claim as part of working. Business expenses can range from purchasing equipment to office space to food for business lunches.

Think of it as a tax on your self-employment profits. It’s the money you took in minus the money you had to spend on things to get to work and do your job.

The complicated answer is that several other factors can change your rate. This is why it may be necessary to consult a tax professional for your self-employment taxes. To explain this, we need to break down what the self-employment tax is for.

What is the self-employment tax for?

As we mentioned above, self-employment tax is, essentially, a stand-in for the payroll taxes you’d pay as an employee. More specifically, it’s two taxes: a 12.4% tax for Social Security (so you can retire with some income) and a 2.9% tax for Medicare (so you can have healthcare when you retire).

If you were an employee, you’d only be paying half that rate. Your employer would pay the other half. Remember what we said about there being trade-offs in being your own boss?

The amount of earnings taxed can vary. For example, in 2020, only the first $137,700 of earnings was subject to Social Security tax. Earnings after that aren’t taxed for Social Security.

In 2021, it’s gone up. The first $142,800 will be subject to the Social Security tax. You can always check these numbers at the IRS website. However, if you’re earning that much money you should be speaking to a tax professional instead.

Do I have to pay self-employment tax?

If you’ve read this far, chances are you already believe you owe self-employment taxes. That might be so, but it’s good to be certain. If you’re filing as an individual, you only owe self-employment taxes if you make over $400 a year from self-employment. 

Self-employment is defined by the IRS as any work you did for another entity where you received a form 1099.

Except for any work you may have made as an employee of a church. It’s a rather specific carve-out. Consult a tax professional if you’re at all uncertain.

Some small businesses may have to pay self-employment taxes as well, particularly small businesses that are, in essence, one person. These might include things like loan-out corporations. 

This is a VERY complicated area of self-employment tax law and well outside the scope of this article. However, simply know that just because your self-employment comes through a small business you own, that does not mean you aren’t on the hook for self-employment taxes.

As always, when uncertain, consult a tax professional. In the case of a small business, you should really have one anyway, as business taxes are no joke.

How do I pay my self-employment taxes?

Of course, all this doesn’t mean anything if you don’t know how to pay your self-employment taxes.

This is where things get complicated for you. Well, more complicated. In the United States, taxes are considered “pay-as-you-go,” meaning you owe them when they’re charged.

For payroll taxes, this isn’t a problem. Your employer is withholding the money and sending it out for you anyway, so they’ve got the infrastructure for it. If you’re self-employed, the government might require you to pay your self-employment taxes quarterly.

Whether or not you pay quarterly is a major part of how you pay your self-employment taxes. If you do need to pay quarterly and you wait until you pay your annual income tax, the IRS may charge you a fine. 

That’s an important thing to remember when it comes to self-employment taxes vs income tax. Income tax must be paid every year by tax day. Self-employment tax might need to be paid every quarter.

However, not every freelancer has to pay quarterly. Per Nerdwallet, you only owe quarterly self-employment payments if:

1. You believe you will be paying at least $1,000 in federal income taxes (that is, your actual income taxes, which are distinct from your self-employment taxes)

 AND

2. “Your withholding and refundable credits will cover less than 90% of your tax liability for this year or 100% of your liability last year, whichever is smaller.”

If that second requirement made your head spin, then you should consult a tax professional to help you determine if you need to pay quarterly or all at once at income tax time.

They’ll be able to best advise you on whether you need to pay quarterly. They’ll also help you determine the best deductions so you can get the best tax rate, along with knowing how to set up quarterly payments for 1099. 

Speaking of self-employment tax deductions…

Self-employment tax deductions 

A key part of getting the best rate for your self-employment taxes is your self-employment tax deductions. 

Remember when we said that self-employment taxes only applied to your net income? Well, that’s defined as your income minus reasonable business expenses. Those business expenses are your deductions.

We’ll give you a simple example so you understand what we mean. Let’s say for the sake of argument that you’re a professional freelance video editor. You need to upgrade your editing computer with a new hard drive as the old one is almost burnt out and is too small.

That brand new solid-state drive? That’s a business expense. You need it to do your job. Same with the new monitor. You can even include upgrades to your home office, like a new ergonomic chair so you can edit without breaking your back.

To determine how much your self-employment tax is, you can deduct those expenses from the self-employment income you earned. You’re only paying 15.3% of the income minus the expenses.

Another example: let’s say you’re a producer with a small production company of just you. You’ve got a movie you think would be perfect for Keanu Reeves. You score a meeting with Keanu, but it has to be at lunch.

The lunch goes well. You’ve wowed Keanu with your deep knowledge of how to pay self-employment taxes. You pick up the tab, wanting to further impress Mr. Reeves with your largess. 

Since the purpose of the meeting was to pitch him on your independent film, you can deduct the bill from your income on your taxes.

Don’t worry, we have it on good authority that Mr. Wick is an excellent lunch guest and would never order an expensive meal on someone else’s dime.

Now, that being said, there are limits to what you can claim on your taxes, and the IRS REALLY doesn’t like it when it thinks you might be cheating. These can be complicated. At what point does your home office mean part of your rent or mortgage counts as a business expense?

To answer that question, we will direct you to the advice we gave at the beginning of this article. When it comes to your self-employment taxes? Consult a tax professional.

Wrapping Up

Self-employment taxes, like anything to do with taxes, can seem intimidating. While these questions can feel overwhelming, you don’t have to go it alone. Consult a tax pro, always. 

While being your own boss has a million perks, keeping track of what you owe rather than an employer doing it for you gets exhausting. Though, if you’re living in California, the latest classification laws (and tests) might claim you as an employee after all.