How Is Self-Employment Tax Calculated?


Quick Answer

The self-employment tax an individual must pay is equal to 15.3 percent of net income, as of 2014, advises the Internal Revenue Service. The self-employment tax rate consists of 12.4 percent towards Social Security tax and 2.9 percent toward Medicare tax.

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How Is Self-Employment Tax Calculated?
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Full Answer

An individual must pay self-employment tax if she is a sole proprietor, independent contractor or member of a partnership, and she earns at least $400 that year, advises the IRS. Self-employment tax is applied to 92.35 percent of net earnings. Net earnings are equal to total earnings minus any business expenses.

Social Security tax is only applied to earnings up to $117,000 per year, states the IRS. All income is subject to Medicare tax, and individuals earning more than $200,000 per year may have to pay a higher percentage toward Medicare taxes. Married couples pay higher Medicare taxes if they earn more than $250,00 when filing jointly or $125,000 when filing as individuals.

The self-employment tax allows individuals in business for themselves to qualify for Social Security and Medicare benefits when they retire, states the IRS. Individuals calculate their self-employment tax using Schedule SE, which must be filed with their income tax return on Form 1040. Individuals must pay self-employment tax even if they are also collecting Social Security income or Medicare benefits.

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