Podcast: Self-Employment Tax

Self-Employment Tax

Written by Jeff Dvorachek

November 4, 2021

We have talked off and on about the Gig Economy where a number of people have second jobs (or sometimes their main job) operating their own businesses. It could be Etsy, Uber, Eat Street or any other of what we used to call side jobs. Some people have done these side jobs for years and some have just started them this year. When we talk to these individuals, some of them are surprised at the additional taxes that they have to pay on this income.

Ok let’s start.

  • As most of us know, as an employee, we have federal and state tax withheld from our paychecks, but there is also Social Security and Medicare tax.
  • Social security tax is 6.2% – Medicare tax is 1.45% – Total is 7.65%.
  • Well if you run your own business, you have to pay what is called self-employment tax.

What is self-employment tax?

  • It is essentially the Social Security and Medicare tax that we pay as an employee.
  • But what some people may not know, your employer pays an additional 6.2% to Social Security and 1.45% to Medicare, just like you as an employee.
  • As a self-employed person, you are the employee and employer, so you have to pay in both parts.
  • So if the Social security and Medicare is 7.65% x 2 = 15.3%.

I guess I did not realize that it was that much.

  • Let’s say that someone was in a lower income tax bracket, say the 12% bracket. This would mean that on the net income from their business, they would pay a 12% income tax and a 15.3% self-employment tax.
  • This 27.3% tax equates to $2,730 for every $10,000 of net profits from your business.

Is there a limit on how much self-employment tax is paid like there is for an employee?

  • Yes – the Social Security portion (6.2% or 12.4% as a self-employed person) max is $142,800 for 2021
  • No max for the Medicare portion (2.9%)

Who pays the self-employment tax?

  • Anyone with income from a small business reported on your personal return – Sch C
  • Farm reported on a Sch F
  • Partners in Partnerships
  • At least at this point, not for owners of corporations (s or c) since paid with W-2 wages. There is talk in Washington about making s-corporation income subject to self-employment tax

How can someone reduce the amount of income or self-employment tax paid?

  • As always, increasing business expenses. This can be done by really keeping track of all your cash inflows, but also your cash outflows. I think Gig business owners don’t keep very good track of their expenses so deductible items do not get taken
  • As a small business owner, you can contribute to a retirement plan based on your business income, but this will result in an income tax deduction, but not a deduction for self-employment tax.

Be sure to talk to a tax professional if you have any questions about the self-employment tax.

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Jeff Dvorachek
I joined Hawkins Ash CPAs in 1998. I am the partner-in-charge of the Manitowoc, WI, office and tax director for the firm. I have thorough experience providing tax services to individuals, commercial businesses, nonprofit entities and estates and trusts. I also provide compilation and review services. I lead the Tax Committee and am a member of the Information Technology Advisory Committee.

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