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Self-Employment Taxes

Those who work as independent contractors must pay self-employment taxes, and not payroll taxes. Payroll taxes are paid by W2 employees and self-employment taxes are paid by the self-employed.

You are self-employed if you typically:

  • Carry on a trade or business as a sole proprietor
  • Are a member of a partnership that conducts a business
  • Are involved in a business for yourself or run a part-time business

last day to file taxes

You are an independent contractor if you more than likely:

  1. 1.Choose the time for completing the work
  2. 2.Choose the place for doing the work
  3. 3.Determine how the work must be done

If all these three criteria are met, then you are not an employee, but are self-employed.

Self-employment tax includes Social Security and Medicare taxes. As the self-employed do not get their taxes withheld from their paychecks, they need to pay the Social Security, Medicare and other applicable taxes when they file their tax return.

Eligibility for Paying Self-Employment Tax

You are required to pay the self-employment tax and file Schedule SE (Form 1040) if:

  • Your net earnings from self-employment (excluding church employee income) were $400 or more, or
  • You had church employee income of $108.28 or more

If either of these two criteria are met, you must pay the self-employment tax.

Calculating your Self-Employment Taxes

To calculate your self-employment (SE) tax, you need to use the Schedule SE on Form 1040. You can deduct the employer-equivalent portion of your self-employment tax when calculating your adjusted gross income. If you are a sole proprietor or an independent contractor, you will generally be using Schedule C or C-EZ to calculate your net earnings.

Tax Rate

For income earned in 2014, the self-employment tax rate is 15.3 percent. Out of the 15.3 percent, 12.4 percent goes to Social Security and 2.9 percent goes to Medicare.

The first $117,000 of your combined wages, tips and total earnings are subject to any combination of the Social Security part of the self-employment, Social Security tax, or railroad tax (tier one). Your combined earnings are also subject to any combination of the 2.9% Medicare part of SE tax, Social Security tax, or railroad retirement tax (tier one).

Deductions

You can claim the employer-equivalent portion of your SE tax. If you file Form 1040 Schedule C, consider claiming the Earned Income Tax Credit (EITC). Make sure that you meet all the qualifying factors of the EITC before claiming it on your return. The EITC is one of the tax credits that are often incorrectly used by many taxpayers.

The self-employed can claim the deduction for the cost of health insurance. You can use the instructions on Form 1040 and Schedule SE to calculate and claim this deduction.