When you work as an employee, your employer withholds Social Security and Medicare taxes from your paycheck. When you're self-employed, you're responsible for paying those taxes. Whether you owe self-employment taxes or not depends on how much you made from your self-employment, not how long you were self-employed.
When Self-Employment Taxes Apply
If your net income from self-employment exceeds $400 as of 2014, you're required to pay self-employment taxes, no matter how long it took you to make that money. Your net self-employment income equals your gross proceeds from being self-employed minus your business expenses. For example, if you own your own bakery, you would start with your sales and subtract the costs of doing business, like rent, ingredients and advertising.
Income Subject to Self-Employment Taxes
Self-employment taxes only apply to your net self-employment income, not all of your income. So, if you were only self-employed for half the year and worked as an employee for the other half of the year, you wouldn't owe self-employment taxes on any of your employee income. For example, say you worked the first six months of the year as an employee at a law firm before deciding to hang your own shingle and start your own firm. You would owe self-employment taxes on the income you made from your own firm, but not the income from working at the law firm.
Self-Employment Tax Rates
As of 2014, the self-employment tax rates are 2.9 percent for the Medicare portion and 12.4 percent for the Social Security portion. The Medicare portion always applies, no matter how much income you have. However, the Social Security portion only applies to a certain amount of income each year. As of 2014, you only pay the Social Security portion on the first $117,000 of income. For example, if you have $120,000 of net self-employment income, you pay both the Social Security tax and the Medicare tax on the first $117,000 and only the Medicare tax on the last $3,000.
Deduction for Self-Employment Taxes
If you must pay self-employment taxes, you can recover a little bit of that money by claiming a deduction for the portion of the taxes that would be paid by your employer if you were an employee, which is half your self-employment tax bill. For example, if you owe $2,000 in self-employment taxes, you can claim a $1,000 deduction on your income taxes. Plus, the IRS counts the deduction as an adjustment to income, so you can claim it even if you don't itemize your deductions.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."