3 Things to Know About Self-Employment Taxes

Updated for tax year 2023.

When you enter the world of freelancing or working as an independent contractor, it’s nice to have the independence of owning your own business. Still, it also comes with new tax responsibilities — one of the most important being the self-employment tax, which is the equivalent of the FICA tax for traditional employees. It consists of the Social Security tax and Medicare tax.

Here is what you should know about self-employment taxes and your business.

1. Who pays the self-employment tax?

People who earn income working for themselves, both full-time and part-time, must pay self-employment tax. That includes all sole proprietors, partnerships, and freelance or independent contractor work. Self-employment tax is in addition to income tax.

However, you don’t have to pay self-employment tax if you earn less than $400 in self-employment income for the year. You also don’t pay self-employment tax on income from capital gains, interest, dividends, and other income that is not considered “earned” income.

Traditional employees don’t pay self-employment tax because they split their portion of Social Security and Medicare tax with their employer. Each party pays half, and the employee’s share is deducted from their paycheck.

2. How much is self-employment tax?

The self-employment tax is 15.3% of your net income, subject to self-employment tax. Social Security tax makes up 12.4%, and Medicare tax accounts for the remaining 2.9%. You pay Social Security tax on your self-employment income up to $160,200 annually in 2023 (up from $147,000 in 2022). That means you could owe a maximum of $19,864.80 in Social Security taxes in 2023 ($160,200 x 12.4%).

There is no longer an upper limit on self-employment income subject to Medicare. Higher-income taxpayers may also have to pay the additional Medicare tax on earnings which equals 0.9%.

If you and your spouse are self-employed, you must both pay self-employment tax. Use a separate schedule to calculate the amount for each of you.

You don’t need to worry about calculating self-employment taxes if you use TaxAct^® to prepare your taxes. If you have a small business or other income subject to the self-employment tax, enter your income and expenses and answer the questions in our tax prep program. TaxAct calculates your net profit from your business along with your self-employment taxes using Schedule SE, Self-Employment Tax.

3. How to pay self-employment tax

Form 1040, Individual Income Tax Return, lists your self-employment taxes as part of your total tax bill. If you owe $1,000 or more in taxes on your self-employment income when you file your tax return the following year, you could owe interest and penalties from not paying your taxes as you earned the income.

To avoid this problem, you should make quarterly estimated tax payments if you make most or all your income from self-employment. You can use TaxAct to calculate the amount you should send to the IRS each quarter, and our program prints vouchers to submit with your payment.

Another option for making quarterly payments is to use the Electronic Federal Tax Payment System (EFTPS) online. You’ll need to sign up ahead of time with the IRS. Allow enough time to get your information in the mail. Don’t wait until the last day to make your EFTPS payment.

If you work as a traditional employee and make a little income on the side that is subject to self-employment tax, you may not need to pay quarterly payments. Your tax withholding from your job may cover it. You can increase your income tax withholding at work to cover the self-employment tax and the income tax on your non-employee income — update Form W-4 with your employer to adjust your withholdings accordingly. You can submit an updated W-4 to your human resources department.

It’s a good idea to estimate your taxes at least once per quarter to ensure your payments are correct. Doing so will help ensure you don’t have a hefty tax bill when you file your return.

This article is for informational purposes only and not legal or financial advice.