If we acquire income from self-employment — such as from a tiny business we own, consulting we do, or freelance work — it might be theme to self-employment tax. Self-employment taxation consists of dual tools — Social Security and Medicare taxes. Here’s how your self-employment taxation will be dynamic in 2017, as good as a calculator that can facilitate a routine for you.
What is self-employment tax?
When we work for an employer, taxes for Social Security and Medicare are typically funded from your paychecks. In further to this, your employer matches a volume of taxation we compensate to both programs.
Self-employed people don’t have Social Security and Medicare taxes funded from their earnings, nor is there an employer creation these payments on their behalf. Therefore, both a employer and worker portions of a Social Security and Medicare taxes are a shortcoming of a self-employed individual, and are collectively famous as a self-employment tax.
In general, we are compulsory to compensate self-employment taxation if your net self-employment gain were $400 or some-more for a year.
Rates and maximums
As we mentioned, there are dual components to a self-employment taxation — Social Security and Medicare.
For a 2017 taxation year, Social Security taxation is assessed during a rate of 6.2% for a employer and employee. Since self-employed people are deliberate to be both a employer and a employee, a Social Security taxation rate for self-employed people is 12.4%. However, Social Security taxation is usually assessed on a initial $127,200 of warranted income.
The Medicare taxation rate is 1.45% any for employers and employees, so self-employed people compensate a Medicare taxation rate of 2.9%. Unlike Social Security tax, there is no income top for Medicare tax. The 2.9% rate relates to all of your warranted income, no matter how high it is. In addition, high-income people compensate an additional Medicare tax, during a rate of 0.9% for any income above $200,000 (single filers) or $250,000 (married filing jointly).
So, a self-employment taxation structure for 2017 is:
- 15.3% on a initial $127,200 in net self-employment income.
- 2.9% on any net self-employment income above $127,200.
Net self-employment income
To calculate your net self-employment income — that is, a volume of your self-employment income used to calculate your self-employment tax, simply greaten your sum self-employment income by 92.35%, or 0.9235.
For example, let’s contend that we acquire a distinction of $130,000 from self-employment in 2017, and we had no other income. Multiplying this volume by 92.35% gives net self-employment income of $120,055. Since this is reduction than a Social Security taxable maximum, a 15.3% rate would request to a whole amount, and we would owe $18,368 in self-employment tax. Half of this amount, or $9,184 (the employer’s portion) is deductible on your taxation return.
How to calculate yours
The calculation for self-employment taxation can be a small complicated. To make your life a small easier, here’s a calculator that can do a math for you.
You’ll notice that there’s a place in a calculator for any income we get from an employer. This is since while you’ll compensate Medicare taxation on each dime of warranted income, a Social Security income extent relates to all of your income, not alone to self-employment income.
In other words, let’s contend that we have a full-time pursuit with an employer, and that we acquire a income of $100,000. On a side, we run a consulting business and acquire a net income of $50,000. Since your employer has already funded Social Security taxation on your $100,000 salary, you’ll usually need to compensate Social Security taxation on a initial $27,200 of self-employment income.