Self-Employment Tax: How To Calculate And File For 2023
Dan Rafter5-minute read
August 03, 2023
Working as a freelancer or independent contractor comes with plenty of perks: You’re your own boss, you can set your hours and you can build your business in your own way. But working as a self-employed entrepreneur comes with challenges, too. One of the biggest challenges is paying your taxes.
When income tax time rolls around, you’ll be on the hook for a larger chunk of state and federal income taxes. That’s because you’re responsible for covering both your self-employment tax and your regular income tax. If you’re not careful, you could face a big bill come tax time.
What Is Self-Employment Tax?
The self-employment tax are taxes paid by freelancers or independent contractors. This amount includes Social Security and Medicare taxes. The self-employment tax for the 2023 tax year stands at 15.3%.
If you were working a typical full-time job, your employer would take your Social Security and Medicare taxes out of your paychecks each pay period. Your employer would also pay for half of those taxes. But, as a self-employed worker, you act as both your own employee and employer. Because of this, you're responsible for covering the entire 15.3% of these taxes.
You're also responsible for paying your normal income tax rates in addition to the self-employment tax. There are seven tax brackets for the 2023 tax year. Depending on your income or filing status, you'll have to pay from 10% – 37% of your 2023 income in taxes.
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How Much Is The Self-Employment Tax Rate For 2023?
For the 2023 tax year, you'll pay 15.3% of your net freelance income in self-employment taxes. That comes out to 12.4% for Social Security taxes and 2.9% on Medicare taxes.
Depending on how much you earned, not all of your self-employment income is hit by all of the self-employment tax. For the 2023 tax year, only the first $160,200 of your self-employment earnings are subject to the Social Security portion of the self-employment tax.
You might, though, have to pay more in Medicare tax if you earned a high amount of self-employment income. For the 2023 tax year, you'll have to pay an additional Medicare tax of 0.9% if your net earnings from self-employment are higher than $200,000 if you’re a single filer or $250,000 if you’re married and filing jointly.
Who Pays The Self-Employment Tax?
You'll pay self-employment taxes if you made $400 or more in net earnings from self-employment, including as a business owner, freelancer or independent contractor. Many self-employed workers receive IRS 1099 forms from their clients that state how much they paid them throughout the tax year.
It's possible to earn both self-employment income and income from a full-time job in the same year. Many people today work both full-time for an employer and run a side hustle. For instance, taxpayers might work in an office 5 days a week but also drive for a ride-sharing app on evenings and weekends. That ride-sharing income is considered self-employment income.
How To Calculate Your Self-Employment Tax
Wondering how much you'll pay in self-employment taxes for the current tax year? Here are the steps to calculate this figure:
- Determine your net earnings. Subtract your business expenses and deductions from your gross income.
- If that number is higher than 0, multiply it by 92.35%, the amount of your self-employment income that is subject to the self-employment tax.
- Multiply that number by the current self-employment tax rate. For the 2023 tax year – payable on April 15 of 2024 – the rate is 15.3%.
- This final number is the self-employment tax you owe.
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How To File The Self-Employment Tax
You’ll have to follow certain steps when filing your income taxes when you are self-employed.
- First, use IRS Form 1040 Schedule C to report the earnings from your business.
- Next, fill out IRS Form 1040 Schedule SE to calculate your self-employment taxes.
- You’ll then need to file your income taxes. If you make self-employment income, you should fill out IRS Form 1040 to file your taxes. That’s because you’ll deduct expenses from your self-employment income – reducing your tax burden – and this form allows you to include those deductions.
To file your taxes, you’ll need a Social Security number of an individual taxpayer identification number, better known as your ITIN.
You'll probably need to pay estimated taxes, too. If you rely on self-employment income, you generally need to pay estimated taxes once a quarter in an amount that depends on your yearly self-employment income.
The goal is to pay enough each quarter to make sure you don't owe too much in taxes when you file on April 15. Most self-employed people will have to make estimated payments if they expect to owe $1,000 or more in taxes when they file their annual returns.
The best way to pay these taxes is through the IRS' Direct Pay feature. You can send money directly from your bank account or pay with a debit or credit card. You can also send the IRS a check or pay by phone.
You'll pay estimated taxes on April 15, June 15, September 15 and January 15 of the following year.
Self-Employment Tax Deductions
One of the tax benefits of working for yourself is that you can deduct several expenses. This reduces your net earnings and your tax burden. It’s important, then, to take advantage of all the tax deductions to which you are legally entitled. Some of the most important include:
- Home office deduction: If you work from home, you can take advantage of the home office deduction. The IRS also requires that you use the space “regularly and exclusively” as a home office. For example, you can’t use a room as both a home office and a bedroom.
- Travel and vehicle use deductions: You can deduct the cost of flights to business-related conferences and meetings. You can deduct the cost of hotel stays, car rentals and train tickets. If you use your car for business, you can deduct a portion of the miles when traveling for work as well as repairs and the cost of
- Meals deduction: In general, you can deduct 50% of the cost of meals you buy for business purposes. However, you can’t deduct meals that you eat at home.
- Health insurance premium deduction: You might be able to deduct your health-insurance premiums if you’re self-employed.
- Rent deduction: If you rent office space for your business, you can deduct your rent payments. You can also deduct any rent payments you make for storing tools or other equipment for your business.
The Bottom Line
Filing income taxes is more complicated when you rely on self-employment income and are responsible for paying the self-employment tax. But if you follow the rules, and take the deductions to which you are entitled, you can ease some of this uncertainty and reduce the amount you’ll need to send to the IRS each year.
Applying for a mortgage when you're self-employed has its challenges. Start your mortgage application with Rocket Mortgage® and let our home loan experts guide you through the process.
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