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Understanding Self-Employment Tax and Social Security

Advanced Tax Solutions, CPA, PC

By Todd Whalen - November 20, 2018

Tax Strategies, Understanding Self-Employment Tax

I’m frequently asked what self-employment taxes are.  Usually this question is in the context of opening a new business and trying to figure out the taxes that go along with the new adventure.
When referring to this tax it really is how self-employed people pay Social Security and Medicare taxes.
Social security is 6.2% of earnings up to a cap (called the Wage Base) on earnings of up to $132,900 as of the time of this writing.  Medicare is 1.45% but there is no cap, so it applies to all earnings.
If someone works as a employee for someone else there is a deduction on the paystub for Social Security and for Medicare.  Social Security is withheld at a rate of 6.2% and Medicare is withheld at 1.45%. Together they total 7.65%. What many people don’t know is that the employer also has to match the amount withheld and pays an additional 7.65%.  Therefore the IRS gets a total of 15.3%, which ½ is paid by the employee and ½ is paid by the employer.
If you are self-employed you are required to pay both the employer and employee side and thus the “Self-Employment Tax” is 15.3% of your self-employment earnings.  This is how self-employed people pay their Social Security and Medicare.  Unfortunately this is in addition to the normal Federal and State taxes.
It is calculated on schedule SE on your annual tax return.  You must file a form 1040 to pay it, so you automatically can no longer file a 1040EZ.
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