US Self Employment Tax Basics

If someone is self employed in the United States, they’re subject to a tax called the US Self Employment Tax. Here are some details about what the self employment tax is, why it exists, and how it is paid:

Why Does the US Self Employment Tax Exist?

The Self Employment Tax is a social security and Medicare tax on the net earnings of self employed individuals in the United States. Wage earners (people who work for someone else and have taxes automatically withheld from their paychecks) also pay social security and Medicate taxes. However, those taxes are generally paid in part by the wage earner and in part by their employer. The self employed are responsible for paying the entire tax, as they essentially serve as both employer and employee.

What is the Self Employment Tax Rate?

As of 2007, the US Self Employment Tax rate is 15.3% of net self employment earnings, with 12.4% allocated to social security taxes and 2.9% towards Medicare taxes. The social security tax portion is only applied to the first $94,200 in net earnings.

How is the Self Employment Tax paid?

The self employed don’t pay their self employment taxes when they file their yearly tax return. Instead, they file what are called “estimated tax payments” every quarter. Essentially, past income is used to estimate what the total yearly tax will be, and payments are broken down as a substitute for the automatic withholding that wage earners are subjected to. As with wage earners, taxes can be over or underpaid, meaning a refund or tax due could result at the end of the year.

Who Pays the Self Employment Tax?

The IRS has simple guidelines for who is required to pay the US Self Employment Tax. That includes non-church employees who earned $400 or more from self employment activities, and church employees earning at least $108.28.

The Self Employment Tax and Income Taxes

The Self Employment Tax is not a substitute for income taxes, and entrepreneurs and freelancers are subjected to the same income taxes as wage earners, in addition to the Self Employment Tax. However, the self employed have a benefit of being able to take half of their Self Employment Tax payment as a deduction for income tax purposes.