Self-Employment Tax : How To Calculate And File For 2020 Taxes
Jerry Brown11-minute read
December 18, 2020
What Is Self-Employment Tax?
Self-employment tax is a combination of taxes – Social Security and Medicare – that people who work for themselves pay. In addition, if you own a small business or work as an independent contractor, you’ll probably have to pay self-employment taxes on your self-employment income. For example, if you drive for Uber outside of your day job, you’ll have to pay taxes if your net earnings exceed $400.
The self-employment tax will also apply if you find yourself in the following situations:
- You’re a member of a partnership or operate as a sole proprietor
- You earn money through a single-member LLC
- You’ve been paid more than $108.28 as a church employee and aren’t exempt from self-employment taxes
As a self-employed individual, you’ll be responsible for keeping track of how much you owe in taxes. This is different from working for an employer, where FICA taxes (7.65% for Social Security and Medicare) are deducted from your paycheck.
Self-Employment Tax Rates For 2019-2020
For the 2020 tax year, the self-employment tax rate is 15.3%. Social Security represents 12.4% of this tax and Medicare represents 2.9% of it. After reaching a certain income threshold, $137,700 for 2020, you won’t have to pay Social Security taxes above that amount. However, you’ll have to pay Medicare taxes on all of your earnings, since there’s no wage base limit. If your income is above a certain limit, you’ll actually have to pay additional Medicare taxes.
How To Calculate Your Self-Employment Tax
To calculate your self-employment tax, follow these steps:
- Figure out your net earnings by subtracting your business expenses and deductions from your gross income.
- If the number is greater than 0, multiply that number by 92.35% – the amount of income subject to self-employment tax.
- Multiply the number you get by this year’s self-employment tax rate, 15.3%. The product is the self-employment tax you owe.
If you’re having trouble remembering the steps above, use the IRS tax form Schedule SE or a self-employment tax calculator.
To demonstrate how this works, let’s take a look at the following scenario: Jim earned a net income of $20,000 this year working as a freelancer. When calculating his taxes, he followed steps 2 and 3 above.
First, he multiplied his net income of $20,000 by 92.35% and got $18,470. Afterward, he multiplied $18,470 by 15.3% and got $2,826. This number is his self-employment tax. He’s responsible for paying $2,290 in Social Security tax and $536 in Medicare tax, or a total of $2,826 in self-employment tax.
For self-employed folks who have a net loss – your business income is less than your revenue – the IRS lets you calculate your taxes using two optional methods. To see if you qualify to use one of these methods, you’ll have to refer to the IRS’s instructions for Schedule SE.
The two optional methods are:
- Farm optional method
- Nonfarm optional method
By using one of these, you may be able to lower your adjusted gross income, potentially making you eligible to receive certain income tax credits and deductions.
How Much Should I Set Aside For 1099 Taxes?
How much you should set aside for 1099 taxes varies based on your location, income and marital status. However, some financial professionals recommend 25% – 35%. This number should be enough to satisfy your self-employment tax, as well as your federal income tax and state tax liabilities.
The reason it depends on where you live is that some states don’t have income taxes. Also, depending on your income, you might have to pay more or less taxes. For example, in 2020, your tax rate would be 22% if you earn over $40,125. If you’re married, how much your partner earns also factors into your tax bracket.
With that being said, if you’d like to get a good estimate, use a self-employment tax calculator.
Available Self Employment Tax Deductions For 2019-2020
Before you file your taxes, it’s a good idea to understand what deductions you may qualify for. By claiming certain deductions, you may be able to reduce the amount self-employment tax on your self-employment earnings.
Earned Income Tax Credit
As a self-employed worker, you may qualify for the earned income tax credit if you have a low to moderate income. The credit increases based on the number of children you claim. For example, if you’re single and claim three qualified children, your adjusted gross income has to be $50,949 or lower.
Here’s the maximum credit amounts for 2020:
- $6,600 if you claim three qualified children
- $5,290 if you claim two qualified children
- $3,584 if you claim one qualified child
- $538 if you don’t claim any child
The IRS has certain rules for a child to qualify.
To qualify for this credit, be sure to see whether you can use one of the optional methods mentioned above. By doing so, you can potentially reduce your adjusted gross income, making it easier to qualify.
Self-Employment Health Insurance Tax Deduction
The self-employment health insurance tax deduction allows you to deduct the cost of your healthcare insurance. If you qualify, you can deduct what you paid for medical, dental and long-term care insurance.
In addition to deducting the amount you paid for yourself, you can deduct the amount you paid for a spouse and child (including stepchild, foster child or adopted child).
To qualify for this deduction, you typically have to meet these two requirements:
- You were self-employed and reported a net income on Schedule C
- You weren’t eligible to participate in an employer’s plan (including a spouse’s plan)
To calculate this deduction, you’ll have to use the self-employment health insurance deduction worksheet.
Home Office Tax Deduction
If you’re a freelancer or business owner who uses a home office to do work, you may qualify for a home office tax deduction. It doesn’t matter whether you rent or own a home. You just have to use the office space “regularly and exclusively,” per IRS guidelines.
And even if you don’t meet that requirement, you can claim this deduction if you perform all of your administrative tasks for your business at home and no other location. A home can be a condo, townhouse, backyard shed, boat, etc.
To calculate how much you could deduct, the IRS allows you to use the following two methods:
- Simplified option
- Regular option
With the simplified option, every square foot of space in your office is worth $5. So, to find out how much you could deduct, you would multiply the square footage of your office by 5. For example, let’s say your home office is 300 square feet. In order to calculate the deduction amount, you’d multiply 300 by 5, which gives you $1,500 – the maximum amount you’re allowed to deduct using this method.
Alternatively, you could use the regular option. Compared to the simplified option, this option is a bit more complex. It requires you to determine how much your home office costs. Do you know how much of your mortgage interest or cost of repairs goes toward your home office?
For those of you who keep detailed records, using the regular option could increase your deduction amount. To decide which one to use, calculate the home office deduction using both methods.
Business Expenses/Tax Write-Offs
To reduce your adjustable gross income even further, here’s a list of business expenses that may be tax deductible.
Do you use the internet for your small business? The IRS allows you to deduct internet-related expenses. For those of you who have a business website, you can deduct the cost of domain registration fees and web maintenance costs.
Although the IRS doesn’t allow you to deduct expenses for using a personal line, you’re allowed to deduct the amount you pay for long-distance business calls. In addition, you may deduct the full phone bill amount for a second line if it’s used exclusively for business purposes.
For meals, as a general rule, you’re entitled to deduct 50% of meals you purchase for business purposes. While you can’t deduct meals you eat at home, you may deduct meals you eat while away from home or meals you eat at a business conference.
Health Insurance Premiums
If you’re self-employed, you may be able to deduct your health insurance premiums if you meet the IRS’s requirements. This applies to premiums you paid for yourself, a spouse or dependent.
You'd use the self-employment health insurance deduction mentioned above to calculate this deduction.
When traveling to a business conference, did you catch a flight? If so, the IRS allows you to deduct that expense.
Here are some other examples of travel-related expenses you can deduct:
- Car rental expenses
- Taxi fees
- Travel by car, bus or cruise (special rules apply)
- Lodging expenses
While you can deduct the cost of your travel, if a family member travels with you, their portion might not be deductible. The only way you can deduct their travel fee is if they're an employee of yours.
Do you use your vehicle for business purposes? You can deduct this expense two ways: the actual expense method or using the standard mileage rate. By using the actual expense method, you’ll get to deduct costs such as depreciation, gas, repairs and registration fees.
If you choose to use the standard mileage rate for this tax year, you’ll be able to multiply every mile you travel for business by $0.575 cents.
Whatever method you choose, just make sure you keep accurate records; you may need these records to prove to the IRS that you incurred these expenses.
You’re allowed to deduct the cost of rent for a property you don’t own. For example, if you rent an office for business use, you can deduct that from your business income. Or, if you rent tools for your business, you may be able to deduct those costs as well.
Are you planning on creating a business to earn a profit? You may be able to deduct the startup costs, including the amount you spend researching whether this is a viable option. It also includes the cost to hire employees and speak with consultants.
Per IRS rules, if you spend $50,000 or less, you can deduct up to $5,000 of your startup costs.
Retirement Plan Contributions
As a self-employed individual, you have access to multiple retirement accounts. For example, you could choose to set money aside in a Simplified Employee Pension (SEP) or a simple 401(k). By doing so, you can reduce your adjusted gross income.
If you’re a sole proprietor, you’ll deduct them on Schedule C or Schedule F. Partners enter these deductions on form 1065.
When you’re self-employed, one of the best things you can do is invest in your education. By doing so, you can potentially earn more money. The IRS allows you to deduct this cost if it's relevant to your career field. For example, if you’re a freelance writer, you can deduct the cost of an “SEO for Writers” course. However, you won’t be able to deduct the cost of a fitness course since it’s not relevant to your business.
As a freelance writer, you may choose to purchase business liability or errors and omissions insurance. Although you might not be happy about paying for this expense, it’s tax deductible.
How To File Taxes While Self Employed
To file a tax return while self-employed, you’d use Schedule C to calculate your income, and then you’d use Schedule SE to calculate your self-employment taxes.
From there, you could do one of the following:
- File your self-employment taxes using online software.
- Pay a tax professional to do file your taxes for you.
- Fill out a 1040 form and mail in your taxes.
After you’ve finished filing your tax return, make sure to keep a record of it. If you’re trying to get a mortgage while self-employed, your lender will need to see copies of your personal tax returns. In addition, they may ask for copies of profit and loss statements for your business.
How To Pay Your Self-Employment Tax
In order to pay your self-employment taxes, you’ll need a social security number or individual taxpayer identification number.
Social Security Number
Your Social Security number is a nine-digit number you get from the Social Security office. If you don’t have one or need to replace a lost card, visit SSA.gov.
Obtain Individual Taxpayer Identification Number
If you’re not a United States resident, you can apply for an individual taxpayer identification number instead. To apply for one, you’d use the IRS form W-7.
Filing Estimated Taxes
Some self-employed individuals have to pay quarterly taxes. To estimate your quarterly taxes, you’d use form 1040-ES. You can pay your taxes by mail via the vouchers included in 1040-ES or you can pay them online using the IRS’s Electronic Federal Tax Paying System.
When using the system, you’ll need these three things:
- Identification number (An EIN or Social Security number)
- Pin number
If you don’t have an account, you can sign up for one, but it’ll take 5 days to process.
Once you’re in, you can pay your taxes via debit card, credit card or a bank draft. If you pay with a debit or credit card, you’ll incur a fee. The fee is $2.58 for a debit card and 1.87% for a credit card (the minimum fee is $2.59).
What Federal Support Is Available For The Self-Employed in 2020?
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law in the spring. It extended relief to self-employed borrowers by making them eligible to receive unemployment benefits.
In addition, the CARES Act provided mortgage assistance to those in need. As a result of this law, homeowners who were impacted by the pandemic could pause their mortgages for up to 12 months.
For more information, read our updated CARES Act mortgage forbearance guide.
Paycheck Protection Program
The Paycheck Protection Program allowed self-employed to take out a loan from the Small Business Administration loan at 1% interest. It was designed to help small-business owners and independent contractors keep their businesses operating during the pandemic. Currently, the Paycheck Protection Program has ended.
EIDL Loans and Grants
Another Small Business Administration program self-employed people had access to was the Economic Injury Disaster Loan program. Similar to the Paycheck Protection Program, borrowers could take out low-interest loans to keep their businesses alive.
The program had a grant program called EIDL advance where borrowers could get up to $10,000 - $1,000 per employee, without having to pay the money back.
Under section 2302 of the CARES Act, self-employed individuals are allowed to defer half of their Social Security tax.
If you’re a self-employed person, you probably won’t have to pay unemployment insurance, especially if you’re a sole proprietor or single-member LLC.
Non-Federal Assistance Program
In addition to federal support, there are some non-federal assistance programs. For example, the Freelance Union created the freelance relief fund to help freelancers who were negatively impacted by COVID-19. The fund offered those who applied up to $1,000 in financial assistance. Although the program was temporarily shut down due to an overwhelming response, the website says it will notify its members when they’ll be able to resume applying for aid.
Also, some state and local governments created assistance programs for small-business owners. For example, a relief program was created in West Alabama that offers grants to businesses who have 2 – 50 employees. In my hometown of Baton Rouge, Louisiana, the Resilient Restart EBR program was created to grant low- to moderate-income business owners $2,500.
If your business has been negatively impacted by COVID-19, be sure to check with your local and state government for information on relief assistance.
Also, be sure to read our COVID-19 resource guide. There, you’ll find more information on where to find financial assistance during the pandemic.
Remember, everyone’s financial situation is different and it’s best to speak with a licensed financial expert or advisor before making any major financial decisions.
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