For Self-Employers: Beginner’s Guide To The Self Employment Tax Form

For small business owners, contractors, and freelancers, the freedom of being your own boss can bring many benefits, from setting your own work schedule to keeping all the profits your business generates. However, there are some drawbacks, and one of these is the requirement to pay self-employment tax.

Read on to find out how self-employment tax works, who has to pay it, how to calculate it, how to file it, and how much you can save.

Let’s get to it!

What is self-employment tax?

People with regular jobs pay payroll taxes for Social Security and Medicare that are typically split with their employers. The employee pays 7.65%, and the employer pays 7.65%, with a total of 15.3% being paid in taxes. 

Self-employment tax is a federal tax that you pay on your net earnings, also consisting of Social Security and Medicare. As with payroll taxes, the current rate is 15.3% and is split with 12.4% going towards Social Security and 2.9% for Medicare. It’s basically the same tax as people with regular jobs, the difference being self-employed people pay both halves.

Who pays self-employment tax?

You are generally considered self-employed if you own your own business, or with others as a partner in a partnership, or are an independent contractor or freelancer. In these cases, your income is subject to self-employment tax.

Even working for yourself part-time with a “side-hustle,” those earnings may also be subject to self-employment tax. The IRS states that any of the above making more than $400 must pay the tax.

What does Social Security Wage Base mean?

The Social Security Wage Base is the maximum gross earnings subject to Social Security tax that can be imposed by the IRS.

For 2022, the Social Security wage base is $147,000. This means Social Security tax only applies to the first $147,000 of your earned income from self-employment. After $147,000, you aren’t charged any additional Social Security tax. However, there is no limit on the Medicare portion of the self-employment tax. So no matter how much you earn, the Medicare tax applies to all your wages and self-employment income.

So, if you make $175,000 from your business or self-employed activities, you’d only pay Social Security tax on the first $147,000. The remaining $28,000 is not subject to Social Security tax, though, as mentioned above, it would be included and taxed for Medicare.  

Step-by-step guide on how to calculate self-employment tax

Calculating your self-employment tax is pretty straightforward! Just follow the steps below.

Step 1: Calculate your net earnings

Start by calculating your net earnings for the year. For the self-employed, this is usually found by subtracting total expenses from gross income or sales.

(Net Earnings = Gross Business Income – Total Business Expenses)

Step 2: Determine how much of your net earnings are taxable

Generally, only 92.35% of your self-employment earnings are subject to the 15.3% tax rate. This is because the 7.65% deduction includes the employer’s half of your The Federal Insurance Contributions Act (FICA) taxes, which would be deducted if you were paid as an employee.

Remember this step before applying the tax rate.

Step 3. Apply the tax rate to net earnings

Now, multiply your net earnings by the tax rate of 15.3%.

(Self-employment tax = Net Earnings x 15.3%)

That’s it! A fairly simple calculation. 

Keep in mind that it’s only the first $147,000 of earnings subject to the Social Security portion of the self-employment tax!

What tax forms do you use to file self-employment tax? 

If you’re going to file your taxes on your own, you’d better get familiar with the following tax forms right away:

Form 1040 

Almost everyone has to file this tax form, including you—a self-employed worker. 

Form 1040 is a federal income tax return that individuals file in the United States. The form determines how much the government owes or refunds based on the taxpayer’s total taxable income.

This form is quite straightforward to file. It requires simple and basic information like your Social Security Number, how many dependents you have, etc. 

Click here to see official instructions to file form 1040 from the IRS

Form 1040X

If you find any mistakes or you left out information on your original return (the 1040 tax form), you then will need to use Form 1040X: Amended Tax Return to file a corrected version of your federal return.

Click here to see official instructions to file form 1040X from the IRS

Schedule C

Anyone who operates a business as a sole proprietor must fill out Schedule C

A Schedule C helps you calculate your business’s net income or loss. It reports  

How much you made and spent throughout the year, and whether you made a profit or loss.

You can also file a Schedule C-EZ instead, which is a simplified version of the form only for those who meet certain requirements, such as running only one type of business and having no more than $5,000 in business expenses. 

You must include a Schedule C or C-EZ with your Form 1040 during year-end taxes.

Click here to see official instructions to file Schedule C from the IRS

On a side note, as you can see from the image above, you need to report your income in the first section, in which you will see some fields like “Returns” and “Cost of Goods Sold.” Normally, these are only applicable when you’re selling a physical product. But, for example, if you sell online advertising, the cost of purchasing digital ad space may be included in the “Cost of Goods Sold.’ So make sure to check your form carefully before submitting it.

Schedule SE

Generally, after you finish filing Schedule C and figure out your total profit or loss, you will move to Schedule SE. Schedule SE is a tax form that helps you determine how much tax you owe to the government. 

Click here to see official instructions to file Schedule SE from the IRS

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3 easy steps to get your self-employment tax forms organized 

Below is a 3-step quick guide to get self-employed workers through the tax season without issues. Check it out!

Step 1. Be aware of your income sources

To know exactly how much tax you need to pay or get refunded as a self-employed, you have to have good records of your earnings: how much and where they are from.

It’s fairly easy to understand why it’s important to be aware of how much you’ve made, but why income sources? 

This is because you will likely receive different tax forms from your client. For instance, if you make more than $600 from a single client or work platform like Upwork or Fiverr, they will probably send you a 1099-NEC by January 31, and if you receive your income through a third-party payment processor like PayPal or Stripe, you might also receive a 1099-K.

Once you’re clear about how much and where your incomes are from, you can understand what documents you’re expected to receive and avoid unnecessary incidents. 

Step 2. Check your deductions 

The good news if you pay self-employment taxes is you are actually entitled to a tax deduction for your federal income tax filing. You can deduct 50% of your self-employment tax bill (the employer portion) from your adjusted gross income, decreasing the amount of taxes you owe.

Let’s say you calculate your self-employment taxes to be $2,000, and you get a tax deduction of 50%, or $1,000, of your taxable income.

It doesn’t stop there—you can apply for more deductions! There are many business expenses that you claim for deductions, including these common ones:   

  •  Internet and phone bills
  •  Office supplies
  •  Computer and software
  •  Continuing education
  •  Auto expenses
  •  Marketing and advertising

Make sure to go over your expenses, claim all possible deductions and not waste a single penny on taxes! 

Also, if you have a difficult time keeping track of your expenses, try Shoeboxed. Shoeboxed is a receipt scanner software that can digitize every receipt of yours and keep them organized safely in the cloud. Stay ahead of your self-employment taxes with Shoeboxed today! 

Step 3. Know when your deadlines are

Federal income tax returns are generally due on April 15 of the following tax year. However, if you’re self-employed, you may need to make quarterly estimated tax payments to cover both your income tax and your self-employment tax obligations. If you must make estimated quarterly payments, they’re due on April 15, June 15, September 15, and January 15 of the following year. 

Remember these due dates may move to the following business day if the 15th falls on a weekend or holiday.

You might also be interested in: How to File for Tax Return Delays if You Can’t Meet the IRS Deadline

Final thoughts 

Being self-employed gives you the freedom to do things your way. However, you must follow the IRS way when it comes to taxes. That’s why it’s extremely vital for you to fully understand what you’re expected to do and how to pay your self-employment taxes correctly, avoiding paying any penalties from the IRS. 

We hope the article has helped you with that! Check out our other blog posts for more financial knowledge! 


What’s Shoeboxed? 

Shoeboxed is a receipt management application that turns your receipts and business documents into a digital format in just one click by taking a picture straight from your smartphone or scanning a pdf. It automatically extracts, categorizes, and human-verifies important data from your receipts so that you can go over and check your records anytime with ease. Shoeboxed ensures you will always have your receipts securely stored and ready for tax purposes.

Access your Shoeboxed account from your web browser or smartphone app. Stay audit-ready with Shoeboxed for FREE now!

Top Ten Facts about Amended Returns

Taxpayers who need to make a change or adjustment on a return they already filed can do so by filing an amended return. Here are the top 10 things every taxpayer should know about amending your federal tax return. Continue reading “Top Ten Facts about Amended Returns”

Are You Missing A W-2?

W-2 Form: Did you get yours?
W-2 Form: Did you get yours?

Did you get your W-2? These documents are essential to filling out most individual tax returns. You should receive a Form W-2, Wage and Tax Statement, from each of your employers each year. Employers have until February 2, 2009 to provide or send you a 2008 W-2 earnings statement either electronically or in paper form. If you haven’t received your W-2, follow these steps:

1. Contact your employer. If you have not received your Form W-2, contact your employer to inquire if and when the W-2 was mailed.  If it was mailed, it may have been returned to the employer because of an incorrect or incomplete address.  After contacting the employer, allow a reasonable amount of time for them to resend or to issue the W-2.

2. Contact the IRS. If you still do not receive your W-2 by February 17th, contact the IRS for assistance at 800-829-1040. When you call, have the following information:

  • Employer’s name, address, city, and state, including zip code;
  • Your name, address, city and state, including zip code, and Social Security number; and
  • An estimate of the wages you earned, the federal income tax withheld, and the period you worked for that employer. The estimate should be based on year-to-date information from your final pay stub or leave-and-earnings statement, if possible.

3. File your return. You still must file your tax return on time even if you do not receive your Form W-2. If you have not received your Form W-2 by February 17th, and have completed steps 1 and 2 above, you may use Form 4852, Substitute for Form W-2, Wage and Tax Statement. Attach Form 4852 to the return, estimating income and withholding taxes as accurately as possible.  There may be a delay in any refund due while the information is verified.

4. File a Form 1040X. On occasion, you may receive your missing documents at a later date and some may have conflicting information. You may receive a Form W-2 or W-2C (corrected form) after you filed your return using Form 4852, and the information differs from what you reported on your return. If this happens, you must amend your return by filing a Form 1040X, Amended U.S. Individual Income Tax Return.

Form 4852, Form 1040X, and instructions are available on the IRS Web site, IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Links:

  • Form 4852, Substitute for Form W-2, Wage and Tax Statement (PDF 29K)
  • Form 1040X, Amended U.S. Individual Income Tax Return (PDF 123K)
  • Instructions for Form 1040X (PDF 43K)