Understanding Self-Employment Tax: What You Need to Know

If you're self-employed, you probably know that taxes hit a little differently. Unlike traditional employees who have taxes automatically deducted from their paychecks, you’re responsible for handling your own tax obligations. That’s where self-employment tax comes in.

But what exactly is self-employment tax? How much will you owe? And, most importantly, how can you lower that tax bill? Let’s break it down in plain English.

What Is Self-Employment Tax?

Self-employment tax (SE tax) is essentially your Social Security and Medicare tax—just like what traditional employees pay through payroll deductions. The difference? Instead of splitting this tax with an employer, you pay both halves yourself.

For 2024, the self-employment tax rate is 15.3%, broken down as:

• 12.4% for Social Security (on income up to $168,600)

• 2.9% for Medicare (on all net earnings)

• If you earn more than $200,000 ($250,000 for married couples filing jointly), you’ll also pay an extra 0.9% Medicare tax on income above those thresholds.

💡 Quick analogy: Think of it like a hike—you’re carrying the weight of your tax burden alone, while employees have an employer helping to shoulder the load.

Who Has to Pay Self-Employment Tax?

If you earned at least $400 in net self-employment income, you’re required to pay self-employment tax. This applies whether you’re a: ✅ Freelancer or independent contractor (1099 worker) ✅ Sole proprietor ✅ Single-member LLC (not taxed as an S-Corp) ✅ Gig worker (Uber, DoorDash, Airbnb, etc.)

💡 Surprising fact: Even if you have a full-time job and a side hustle, self-employment tax still applies to your freelance earnings!

How to Calculate Self-Employment Tax

Let’s say you made $50,000 in self-employment income. Here’s how the math works:

1. First, deduct 7.65% from your net earnings before calculating SE tax (since employees only pay half, the IRS lets you do the same). So, your taxable self-employment income = $50,000 × 92.35% = $46,175.

2. Then, apply the 15.3% tax rate:

   • $46,175 × 15.3% = $7,062 (self-employment tax owed)

✅ The good news? You can deduct half of this tax ($3,531) from your taxable income when filing your return.

How to Reduce Self-Employment Tax

You don’t have to just accept self-employment tax as a massive hit to your earnings. Here are three strategies to lower your tax bill:

1. Take Advantage of Business Deductions

The IRS only taxes net self-employment income—so the more expenses you deduct, the lower your taxable income. Some common deductions include: ✅ Home office expenses ✅ Internet & phone bills (business portion) ✅ Business meals & travel ✅ Equipment & software ✅ Health insurance (for self-employed individuals)

2. Consider an S-Corp Election

If your net earnings are $50,000+, switching to an S-Corp structure could help you avoid SE tax on a portion of your income. Instead of paying self-employment tax on everything, you pay yourself a “reasonable salary” and take the rest as distributions—which aren’t subject to SE tax.

💡 Example: If you pay yourself $40,000 as a salary and take $30,000 as distributions, you only owe self-employment tax on the $40,000, not the full $70,000. That’s serious tax savings!

3. Contribute to a Tax-Advantaged Retirement Plan

Self-employed people have access to some of the best retirement tax shelters. Contributing to a Solo 401(k) or SEP IRA not only helps you save for the future, but it lowers your taxable income today—which means less self-employment tax owed.

Filing & Paying Your Self-Employment Taxes

Since no one is withholding taxes from your income, you’re responsible for making estimated tax payments throughout the year. These are due quarterly: 📅 April 15, June 15, September 15, and January 15 of the following year.

To avoid IRS penalties, make sure to: ✅ Use IRS Form 1040-ES to calculate and pay estimated taxes. ✅ Set aside at least 25-30% of your income for taxes. ✅ Keep good records of income and expenses (QuickBooks or a simple spreadsheet works).

Final Thoughts: Stay Informed & Stay Ahead

Self-employment tax might seem like an unavoidable burden, but with the right planning and strategies, you can minimize what you owe while staying compliant with the IRS.

If you’re a detail-oriented person, you can absolutely tackle this on your own—just be sure to track everything carefully. But if you'd rather focus on running your business (or watching the Lakers instead of crunching numbers), I can help https://www.glavinicfs.com/bookandrew.

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