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What is self-employment tax?

What is self-employment tax?

Most people are required to pay federal and state income taxes each year, which usually make up the majority of your tax liability. When you’re self-employed, you’ll likely need to pay an additional kind of tax called “self-employment tax.”

You’ll owe self-employment tax if you:

  • Work for yourself

  • Will make $400 or more in self-employment income this year

Self-employment tax is meant to mirror the Social Security and Medicare taxes that are typically withheld from the paychecks of W-2 employees; since self-employed people don’t have an employer to withhold these taxes from their paychecks for them, they’re required to pay these taxes on their own.

Your self-employment tax is calculated by taking your business profit, and multiplying it by the self-employment tax rate of 15.3% (12.4% for Social Security, and 2.9% for Medicare). In 2020, the first $137,700 of your yearly self-employment income is subject to this 15.3% tax. If your yearly self-employment income is higher than $137,700, you’ll pay a different tax rate that doesn’t include the Social Security portion of the normal self-employment tax rate.

Don’t worry, Found will calculate your self-employment tax for you! The tax bill listed on the “Taxes” tab of your Found app already includes your self-employment tax, if you owe any. If you’d like to see the details of how self-employment tax is calculated, you can find the formula on the Schedule SE form, which is an extra form that needs to be attached to your tax return if you meet the requirements to pay self-employment tax.

Self-employed taxpayers also get a tax break that allows them to deduct one half of their self-employment tax. This deduction isn’t a business expense; it’s an “adjustment” to your income that will lower your taxable income and allow you to pay less in taxes. Your Found app will automatically factor in this deduction for you when calculating your tax bill!

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