What Does Self-Employment Taxes Entail?

Self-employment taxes are typically levied on self-employment income of at least $400. The taxes cover Medicare and Social Security levies. Self-employment tax can be applied to any income you earn as an independent contractor, consultant, or freelancer. This is to account for the fact that income tax is not withheld from a paycheck like it would be if an individual was in an employer-worker relationship.

Who Has To Pay Self-Employment Tax?

As stated earlier, self-employment tax can be applied to income earned as an independent contractor, consultant, or freelancer. You are an independent contractor if you work for a ridesharing or food delivery app. If the organization you work for doesn’t classify you as an employee or withhold payroll taxes then you are considered to be self-employed. This means you will owe self-employment tax.

For instance, if a graphic designer works full-time at a software company, they might have Medicare and Social Security taxes withheld from their paycheck. This is alongside other taxes such as federal and state income tax.

Nevertheless, if the same graphic designer works as a freelancer earning $600 per month, they are likely to receive the entirety of that payment each month, without anything getting withheld. The graphic designer would then be solely responsible for reporting and paying the tax on their freelance income, as well as other forms of tax. This would have to be done using the estimated tax payments.

You should note that the Social Security portion of the self-employment taxes are capped at a particular amount. For the tax year 2022, the first $147,000 in net income is taxable. 

For individuals that earn more than a particular amount of income—based on their filing status—can also be subject to an additional Medicare tax at 0.9. Single filers have a threshold of $200,000, while married couples that file jointly have a threshold increased by $50,000 to $250,000. 

What Is The Self-Employment Tax Rate?

The standard self-employment tax rate is 15.3%, which is a combination of the 2.9% Medicare tax and 12.4% Social Security tax. This standard tax rate is typically applied to about 92% of a self-employed person’s net earnings. It can also be applied to the remainder of a business’s income after business expenses deductions have been made. 

For instance, if you earned $60,000 as a freelancer in 2022, then your taxable self-employed income would be 92% of $60,000 which would be $55,200. Since the tax rate is 15.3%, you would have to pay 15.3% of $55,200 which is $8,445. 

How Do Self-Employment Taxes Differ From Payroll Taxes

Self-employment taxes are linked to self-employed workers, taking the place of other taxes that would be paid if these workers were employed by an organization. In an employer-employee relationship, both parties put half of the Medicare and Social Security taxes, collectively known as FICA, or payroll taxes. 

Both employer and employee pay 7.65% (1.45% for Medicare and 6.2% for Social Security). While this typically means employed workers do not pay for these taxes as directly as self-employed individuals, the taxes are still the same. In self-employment cases, the self-employed individual pays both shares. 

Self-employed individuals are also able to deduct half the amount they owe in self-employment tax to account for what an employer typically pays. For instance, the graphic designer earning $60,000 and owing $8,445 in taxes would deduct $4222 to lower their adjusted gross income to $55,777, apart from other deductions. This process can help them save money on their income taxes. 

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