Self-Employment Tax Represents All of the Following Taxes, Except?
Understand what self-employment tax covers, what it doesn’t, and how to accurately calculate and report your tax obligations as a self-employed individual.
Self-employment tax is a key financial responsibility for freelancers, independent contractors, and small business owners. Unlike traditional employees, who have payroll taxes withheld, self-employed individuals must handle these taxes themselves. Knowing what this tax includes—and what it doesn’t—helps prevent surprises when filing.
Components of Self-Employment Tax
Self-employment tax consists of Social Security and Medicare taxes. Traditional employees split these taxes with their employers, but the self-employed pay both portions. The total rate is 15.3%, with 12.4% allocated to Social Security and 2.9% to Medicare.
The Social Security portion applies to net earnings up to an annually adjusted limit—$168,600 in 2024. Income beyond this is exempt from the 12.4% tax. Medicare tax has no cap, meaning all net earnings are subject to the 2.9% rate. Additionally, individuals earning more than $200,000 ($250,000 for married couples filing jointly) owe an extra 0.9% Medicare surtax on income exceeding these thresholds.
Taxable income is determined by subtracting business expenses from total earnings. The IRS allows a deduction of 50% of the self-employment tax when calculating adjusted gross income, acknowledging that traditional employees only pay half, with their employer covering the rest.
Taxes Not Covered by Self-Employment Tax
Self-employment tax covers Social Security and Medicare but does not include federal income tax. Unlike traditional employees, who have income tax withheld, self-employed individuals must estimate and pay these taxes quarterly to avoid penalties. The amount owed depends on total income, deductions, and filing status.
State and local taxes also fall outside self-employment tax. Some states, like California, have high progressive income tax rates, while others, like Florida and Texas, impose no state income tax. Certain cities, such as New York City, also levy local income taxes.
Self-employed individuals selling goods or taxable services may be responsible for sales tax. Businesses in states with sales tax must collect and remit it to state agencies. Compliance requires understanding state-specific rules, as some states exempt certain services or apply different rates based on the product sold. Failing to collect and remit sales tax properly can lead to audits and penalties.
Those who own business property or operate from a physical location may owe property taxes. Local governments assess these taxes based on real estate or business asset values. A freelancer owning an office pays property tax on that space, while a contractor with expensive equipment may owe personal property tax. These obligations vary by jurisdiction and can significantly impact tax liability.
Paying and Reporting Your Self-Employment Tax
Managing self-employment tax requires planning, as late payments result in penalties and interest. Since taxes aren’t automatically withheld, individuals must make estimated payments throughout the year. The IRS requires these payments if total tax liability exceeds $1,000. Deadlines are April 15, June 15, September 15, and January 15 of the following year. Missing these deadlines can lead to underpayment penalties based on the shortfall and the IRS’s current interest rate.
To calculate the amount owed, self-employed individuals use IRS Form 1040-ES, which provides a worksheet for estimating taxable income, deductions, and credits. Many reference prior-year tax returns, adjusting for expected changes in income or expenses. Some opt for the “safe harbor” method, ensuring they pay either 90% of the current year’s tax liability or 100% of the previous year’s total tax to avoid penalties.
When filing an annual tax return, self-employment tax is reported on Schedule SE (Form 1040). This form calculates the total amount owed based on net earnings and accounts for estimated payments made. The IRS allows electronic payments through the Electronic Federal Tax Payment System (EFTPS), which provides confirmation receipts and scheduling options. Other payment methods include direct bank transfers, credit cards, and paper checks, though some may incur processing fees.