This free online calculator can be used to estimate your self-employment tax for Social Security and Medicare based on your anticipated business income.
It will also calculate the amount of your self-employment tax deduction and let you know how much you owe in additional Medicare tax if you are over the income threshold.
The calculator will also generate the Form 1040-ES tax and deduction worksheet that can be used to help you estimate your quarterly taxes.
What Is Self-Employment Tax
So you’ve decided to go achieve the American dream by becoming your own boss. Your new business is taking off after lots of hard work and everything is going awesome. Come tax season, you go to your accountant, who congratulates you on your newfound success and then informs you that you now owe the government even more money for being in business for yourself.
You’ve just discovered what is known as the self-employment tax
Created in 1954 by the Self-Employment Contributions Act (SECA), this tax law requires self-employed individuals of small businesses to pay 15.3% of their net income towards Social Security and Medicare.
Normal employees and employers also pay the same 15.3% towards Social Security and Medicare as outlined by the Federal Insurance Contribution Act (FICA) of 1935, only their version is split in half with the employer paying 7.65% and employee paying 7.65%.
Since you are your own employer, aka self-employed, you are now also responsible for the employer’s portion.
Who Must Pay Self-Employment Tax in 2021?
Those who may be subject to self-employment tax include partnerships, limited liability corporations, sole proprietorships, and farmers.
LLC members may or may not be subject to the self-employment tax depending on if they’ve elected to treat the LLC as a C or S corporation. By default, a single-member LLC is treated as a sole proprietorship, and a LLC with more than one member is treated as a partnership.
Even if you earn wages from an employer, if you have made $400 or more a year in a side business of your own, you still need to pay self-employment taxes on the profits from your business.
Since the amount of tax you must pay is calculated from your business’ net profits, it is to your benefit to deduct any and all business expenses used to generate your business income.
The self-employment tax applies no matter your age, even if you are retired and receiving Medicare and Social Security benefits. This is also true even if you are a digital nomad living in Thailand for most of the tax year and you qualify for the foreign earned income exclusion.
How To File Self-Employment Tax
When filing your annual taxes, you will use the Schedule C of the Form 1040 to calculate your net profit or loss from self-employment. This number is derived from your gross income minus all your business expenses and deductions.
Your net profit amount from the Schedule C will then be used in the Schedule SE of Form 1040 to calculate how much self-employment tax you owe.
Those who are married and file a joint tax return with a spouse who is also self-employed will need to calculate each person’s self-employment tax obligations separately.
In addition to filing your taxes by April 15, as a self-employed person, you are expected to pay estimated taxes quarterly. This is done by using Form 1040-ES, Estimated Tax for Individuals. Estimated taxes are expected by the IRS because you do not have an employer to withhold taxes from your income during each pay period like traditional employment. You have the option to either estimate your taxes each quarter from that quarter’s income or dividing your previous year’s total tax by four and making four equal payments.
What Are The Self-Employment Tax Rates and Limits for 2021
The below table shows the Medicare and Social Security tax rates for 2021
The law sets the maximum earnings subject to the Social Security tax. This ceiling has steadily increased over the years.
For the 2021 tax year, the maximum amount that is taxed for Social Security is $142,800.
Any wages and earnings over this amount will not be subject to the 12.4% tax. For 2021, the most you will pay for the Social Security portion is $17,702.20.
For the Medicare portion of the self-employment tax and FICA, all wages from traditional employment and business earnings are taxed at 2.9%. There is no tax cap like the Social Security portion.
Under the Affordable Care Act, there is an additional 0.9% Medicare tax for income, wages, and compensation that exceed $200,000 if you are single, a head of household, or a qualifying widow(er) with dependent child. The income threshold for married filers is $250,000 (or $125,000 if married and filing separately).
This means that if you are single and earn $250,000 a year, the first $200,000 in earnings is taxed at 2.9%. The remaining $50,000 will be subject to the 0.9% surtax for a total tax of 3.8%. Your total Medicare tax bill will be approximately $7,000 after accounting for the deductible employer’s portion of the self-employment tax. The steps to calculate your additional Medicare tax can be found in the IRS Form 8959.
Self-Employment Tax Calculator
Use the below calculator to get an estimate of your SE taxes. The results also include the calculations from the Form 1040-ES, Estimated Tax For Individuals worksheet for the 2021 tax year for your reference.
Select your filing status. This will be used to determine if you owe the Additional Medicare Tax.
Fill in your expected business net income. You have the option to enter the amount of your earnings annually, or quarterly, monthly, weekly, or daily and the calculator will annualize the amount for you.
If you will have farm income and you also receive social security or disability benefits, next enter your expected Conservation Reserve Program payments.
Finally, if you are employed and have wages that are subject to FICA or the 6.2% portion of the tier1 railroad retirement tax, enter your wages in the last field. This amount will be taken into account towards the income limit for Social Security.
|Social Security Tax:|
|Total Self-Employment Tax:|
|Self-Employment Tax Deduction:||
|Additional Medicare Tax:|
|2021 Self-Employment Tax and Deduction Worksheet|
|1a.||Enter your expected income and profits subject to self-employment tax|
|b.||If you will have farm income and also receive social security retirement or disability benefits, enter your expected Conservation Reserve Program payments that will be included on Schedule F (Form 1040) or listed on Schedule K-1 (Form 1065)|
|2.||Subtract line 1b from line 1a|
|3.||Multiply line 2 by 92.35% (0.9235)|
|4.||Multiply line 3 by 2.9% (0.029)|
|5.||Social security tax maximum income||137,700|
|6.||Enter your expected wages|
|7.||Subtract line 6 from line 5|
|8.||Enter the smaller of line 3 or line 7|
|9.||Multiply line 8 by 12.4% (0.124)|
|10.||Add lines 4 and 9. Enter the result here and on line 9 of your 2021 Estimated Tax Worksheet|
|11.||Multiply line 10 by 50% (0.50). This is your expected deduction for self-employment tax on Form 1040, line 27. Subtract this amount when figuring your expected AGI on line 1 of your 2021 Estimated Tax Worksheet|
Do you think it’s fair that self-employed people are required to pay both the employee and employer’s portion of the SS and Medicare tax?