Calculating this expense in advance can ease your tax load.
6 Things to Know About Self-Employment Tax
A 2019 FreshBooks research report called “Self-Employment in America” revealed that the number of self-employed is rising rapidly. 
Roughly 24 million people in the U.S. now employ themselves, including freelancers, gig workers, independent contractors, small business owners, and startup founders. Many of these people prefer the freedom and control they have over their work.
What they may not enjoy are self-employment taxes that workers in traditional jobs don’t have to pay. Weighed against all the benefits of being self-employed, this tax is actually a minor inconvenience that you can minimize with the right strategy.
Click or swipe through to learn more about self-employment tax and how to address it as part of your financial strategy...
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1. Know the definition of self-employment tax
Self-employment tax includes Social Security and Medicare taxes.  Since self-employed individuals don’t receive traditional paychecks where taxes are deducted from each check, the self-employment tax replaces the traditional Social Security and Medicare withholding.
In 1935, the Federal Government established the Federal Insurance Contribution Act (FICA) to help fund Social Security and Medicare. Right now, the FICA tax is 15.3 percent. This amount is split between employers and traditional employees, with each paying 7.65 percent.
As self-employment developed, the federal government wanted to make sure these people paid their fair share into Social Security and Medicare coffers. In 1954, the federal government established the Self-Employed Contributions Act (SECA) that required that self-employed individuals pay the entire 15.3%. Sometimes, the self-employment tax is referred to as the SECA tax.
2. Understand how to calculate self-employment tax
Use Schedule SE that accompanies Form 1040 or 1040-SR for tax filings. This schedule serves as a worksheet to calculate your self-employment tax.
The tax rate is 15.3 percent, which consists of 12.4 percent for Social Security and 2.9 percent for Medicare. The amount is calculated on net earnings, which means you first subtract any deductions like business expenses from the gross earnings amount.
Each year, the IRS may change the portion of total wages, tips, and net earnings that are subject to self-employment tax. In 2019, the first $132,900 was subject to the Social Security portion of the self-employment tax rate. For 2020, this amount will go up to $137,700. All of your combined wages, tips, and net earnings above this amount are subject to the 2.9 percent Medicare part of the self-employment tax.
That’s not the end of it, however. Since 2013, as part of the Affordable Care Act (ACA), there is also a 0.9 percent Medicare surtax on any income over a certain threshold amount.
The threshold is $200,000 for individuals filing as single, $250,000 for married couples filing jointly, and $125,000 for married couples filing separately. Anything over those amounts is taxed at that 0.9 percent rate.
3. Determine if you actually need to pay self-employment tax
Self-employed individuals who have a trade or business and operate as a sole proprietor or an independent contractor must pay self-employment tax. This tax is paid in addition to income tax paid by small business owners, freelancers, gig workers, and more.
To determine if you must pay a self-employment tax based on your earnings, you must calculate the net profit or net loss from your business. If your net earnings are more than $400, then you have to file an income tax return and calculate your self-employment tax.
The self-employment tax obligation basically applies to anyone who works and doesn’t have taxes automatically taken out of their checks by an employer. It applies to all age demographics and income brackets. Even those who already collect Social Security benefits can be subject to self-employment tax if they work for themselves.
4. Remember that self-employment tax is also a deductible expense
It’s possible to deduct a portion of your self-employment tax to offset some of your income tax. However, that does not affect self-employment net earnings or self-employment tax.
Additionally, if you file a Schedule C with your Form 1040 or 1040-SR, you may be eligible for the Earned Income Tax Credit (EITC).
Another small financial relief is the self-employment health insurance tax deduction. A percentage of the cost of health insurance for your self-employed healthcare plan may be deducted if you pay it directly.
If you pay it through an insurance marketplace like CoveredCA, you cannot claim this deduction, because you are already receiving a credit on the cost of the insurance plan.
5. Know how to pay your self-employment tax
Your self-employment tax amount is recorded on your tax filing and becomes part of the overall calculations that will determine if you will owe money or if you will receive a refund.
In order to file your taxes, which includes payment for self-employment tax, you must have a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN).
As a self-employed individual, you are also required to make quarterly estimated tax payments, which includes payment for estimated income tax and estimated self-employment tax for the year.
6. Reach out to a tax professional for advice about self-employment tax
Self-employed individuals can quickly face complex tax filings, which may lead them to miss out on deductions or benefits or even to file incorrectly and risk incurring fines.
Typically, employers perform many of the tax calculations for a traditional employee. However, as a freelancer, gig worker, or other type of self-employed individual, you’ll need to perform these calculations yourself.
If this makes you nervous because you are not a number-cruncher or you are new to self-employment taxes, then it’s a good idea to seek the assistance of a tax professional. They are trained to do the calculations for you, file your taxes, and guide you on how to make your estimated tax payments.
Moreover, an accountant or other tax professional can help you with planning on how to reduce your future taxable income through specific qualifying business deductions and retirement plan contributions.
Published by Debt.com, LLC