Millions of Americans earn their living or pick up extra cash working on their own. You might do babysitting or dog-walking -- or you could be marketing consulting services to some of America’s largest corporations. Regardless, anytime you work for yourself instead of an employer, you are responsible for figuring self-employment taxes. The term self-employment tax means the Social Security and Medicare taxes self-employed individuals have to pay and does not include income tax or other taxes you may owe the government.
Add up your revenues. Revenues include all the money you are paid for goods sold or services provided as a self-employed individual. Next, subtract your business expenses. The difference is your net earnings. If your net earnings for the year are at least $400, you have to figure self-employment tax and report your self-employment income to the Internal Revenue Service.
Multiply your net earnings by 12.4 percent to calculate the Social Security component of self-employment tax. This rate can vary. For instance, the Social Security self-employment tax rate for 2011 and 2012 was reduced by 2 percent to 10.4 percent, but is scheduled to return to 12.4 percent in 2013. There is an income cap for Social Security tax, which is adjusted yearly. For example, the cap for 2012 was $106,800. If net earnings are more than the annual income cap, don’t figure Social Security tax for the amount in excess of the cap.
Multiply net earnings by 2.9 percent to figure the Medicare tax. There is no income cap for the Medicare tax, so you figure it on all of your net earnings.
Add the amounts of Social Security and Medicare taxes together to figure the total self-employment tax you owe.
- You may be required to estimate your self-employment and income taxes owed and file a quarterly estimated tax return. To see if you must file an estimated return, see IRS Publication 17, “Your Federal Income Tax.”
- To calculate and report self-employment tax and federal income tax due on self-employment income when you file your annual tax return, use IRS Form 1040, Schedule SE.
Based in Atlanta, Georgia, W D Adkins has been writing professionally since 2008. He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.