The self-employment tax is calculated as a percentage of your net self-employment earnings. In 2014, the self-employment tax amounts to 15.3 percent of net earnings and consists of two parts:
- 12.4 % for Social Security
- 2.9 % for Medicare
The instructions for calculating the self-employment tax are found on IRS form Schedule SE: Self-Employment Tax:
- Refer to your Schedule C (or Schedule Cs if you have multiple small businesses) and enter the total amount of net profit (if less than $400, stop).
- Multiply that amount by 92.35 % (you are not taxed on your full earnings).
- For earnings less than the Additional Medicare Tax threshold, multiply the amount by 15.3%
- If you earned more than the threshold amounts found on the 1040 Schedule SE instructions, then a .9% Additional Medicare Tax may apply. Social security is capped, but all earnings are subject to Medicare.
- Multiply your self-employment tax by .50
- Enter that figure on line 27 of form 1040 in the section labeled "Adjusted Gross Income"
Here's a little-understood fact about the United States tax system: While most of us think of April 15 as Tax Day, the government is actually collecting income tax and other taxes year-round. That's how it keeps government programs funded and makes interest payments on the national debt.
If you work for someone else, your employer withholds income taxes and employment taxes — another name for Social Security and Medicare contributions — from each paycheck and deposits the funds in Federal Reserve banks. If you're self-employed, you also have to pay taxes year-round in the form of estimated taxes.
Estimated taxes consist of three parts:
- Federal income tax
- State income tax (unless you live in Alaska, Florida, Nevada, South Dakota, Texas, Washington or Wyoming)
- Self-employment tax
Follow the instructions on IRS form 1040-ES: Estimated Tax for Individuals to calculate your estimated tax payments for the coming year. The process is almost identical to the one used for calculating this year's self-employment tax, except the amount due is divided into four equal payments. Estimated taxes are due quarterly.
The estimated tax due dates for 2015 are:
- April 15, 2015
- June 15, 2015
- Sept. 15, 2015
- Jan. 15, 2016 (for fourth quarter 2015)
If your total estimated self-employment tax for the upcoming year is less than $1,000, you don't have to pay estimated taxes. But if you owe more than that amount and you fail to make estimated payments, you will be penalized a small percentage (3 % in 2014) of the amount unpaid each quarter.
You can pay estimated taxes online using a credit card or direct bank account transfer through IRS E-Pay. If you prepare your income taxes using tax preparation software, the program will automatically generate four estimated tax vouchers that you can mail in with your estimated tax payment each quarter. There are different mailing addresses for each state, so check out the instructions for Form 1040 SE for the location nearest you.