Working as a freelancer comes with a number of benefits. But the reality is that the onus is on you when it comes to taking responsibility for your earnings. As a self-employed person or independent contractor, you will have to pay what is known as self-employment tax. This is basically a Social Security and Medicare tax for those who are self-employed. It is calculated based on your net earnings from self-employment. If you already feel overwhelmed, don't worry. We'll explain exactly what self-employment tax is, how to calculate how much you have to pay, and how to pay it. We'll also show you how to use our standalone tax calculator and answer some of the most frequently asked questions about how to use Schedule SE accurately. We will discuss the self-employed tax calculator spreadsheet.
What is the Self-Employment Tax?
Self-employment tax is the amount of tax you have to pay when you are self-employed. When you work full-time for a company, your employer deducts Social Security and Medicare taxes from paychecks each pay period and pays half of those taxes. But when you are self-employed, you work as both an employee and an employer. Therefore, you must cover the full amount of the tax. You will also have to pay ordinary income tax in addition to self-employment tax. For taxable year 2021, 15.3 percent of the amount subject to self-employment income tax must be paid as self-employment tax. This is the sum of the social security and Medicare tax rates. In general, the social security tax rate is 12.4 percent and the Medicare tax rate is 2.9 percent.
Who has to pay self-employment tax?
The following is a non-exhaustive list of the types of people who must pay self-employment tax:
- Self-employed individuals who have net earnings of $400 or more from self-employment during the year;
- Most partners in a partnership, including members of an LLC;
- You are not exempt from self-employment tax if you receive Social Security benefits;
- Self-employed workers who have had losses, although there are rules that can reduce the amount of tax you have to pay, which we'll cover later.
As an employee of a business, you receive a W-2 tax form, which provides the business with your Social Security number, so they can withhold these taxes from your paycheck. When you are self-employed, you will need to file Schedule SE with your tax return. This is where you will calculate your self-employment tax liability and pay the appropriate amount.
Tax calculator
Based on your earnings and other income, this calculator provides a breakdown of all the taxes you can expect to pay, as well as the final build figure. The taxes shown are:
- Income tax
- dividend tax
- Employer contributions to Social Security
- National insurance contributions for employees
- Corporation tax
It shows your best mix of salary dividends to minimize your overall tax liability and compares sole proprietorships and limited partnerships in terms of tax efficiency at different income levels. Please note that some employers, typically those with two or more employees, can claim the Employer Allowance, which slightly increases the effective wage level. If this applies to you, adjust these numbers with your accountant.
What is the difference between income tax and self-employment tax?
The self-employment tax is the Social Security and Medicare tax for people who are self-employed. It is calculated on the net income from self-employment. Income tax is a tax that is levied on all types of income, including wages, salaries, tips, interest, dividends, and capital gains. Income tax is calculated on the total amount of income earned, but self-employment tax is only calculated on net earnings from self-employment. You will have to pay both taxes if you are self-employed. As we have already mentioned, the 1040 form is used to report income tax and self-employment tax. As a reminder, Schedule SE is the part of Form 1040 where you will calculate your self-employment tax.
How to calculate your self-employment tax?
Even if you're using a self-employment tax calculator or an accountant to figure your self-employment tax for the year, it's important to know how to figure it yourself. Part of being a successful freelancer is knowing your taxes, so you can be sure everything is being done correctly.
Calculate your net earnings
To figure your self-employment tax, you'll need to know your net earnings from self-employment for the year. Your net earnings are your total self-employment earnings, minus any allowable business expenses. Tax-deductible business expenses include items such as cost of goods sold, office expenses, travel expenses, and marketing expenses. As a self-employed person, you should become familiar with tax-deductible business expenses, so you can track them throughout the year and save money.
Calculate your self-employment tax
Once you know your net earnings, you can calculate your self-employment tax. The current self-employment tax rate is 15.30 percent. This means that you multiply your net earnings by 0.1530 to get the amount of self-employment tax you have to pay. For example, if your net earnings are $18,000, your self-employment tax is $2,754.
Pay your self-employment tax
Of course, once you've calculated your self-employment tax, you'll need to pay it. It is not advisable to pay your self-employment tax all at once, as the IRS states that "taxes must be paid as you earn or receive income during the year." Tax payments are generally made quarterly and estimated tax must be paid by anyone. Self-employed, who are expected to owe $1,000 or more when they file their returns. When you pay your estimated tax, you'll use Form 1040-ES to figure your estimated self-employment tax.
Before you go, I hope that the above article related to self-employed tax calculator spreadsheet will be helpful and informational for you.
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