What is Self-Employment Tax?

In the terminology used by the Internal Revenue Service (IRS), Self-employment tax refers only to the Social Security and Medicare taxes required from individuals who work for themselves.

When a resident of the US works for an employer, that employer generally withholds pay that is applied to Social Security and Medicare taxes. Those withholdings are paid prior to the paycheck. The amounts are subtracted from the total and removed from the “take-home pay.”

If you work for yourself and are paid via 1099 for work completed rather than by W-2, then you need to pay these federally-mandated taxes on your own.

What is the rate for the self-employment tax?

The federal self-employment tax rate is set at 15.3%. It can be considered in two parts. 2.9% is for Medicare, meaning hospital insurance and other federal health care costs – not including the full health coverage you may opt into under the Affordable Care Act. 12.4% is for Social Security. This refers to benefits paid out in old age, as well as disability insurance and survivor coverage.

For the 2019 tax year, the Social Security portion of that tax only applies to wages and tips that total less than $132,900. For any amount you earn above $132,900, the Medicare self-employment tax will still apply, but the Social Security portion will not be assessed.

In 2020, that total – above which you do not pay Social Security self-employment tax – will increase to $137,700.

For any additional questions regarding self-employment tax and how to possibly offset those amounts with other deductions, please feel free to contact our office and speak with one of our tax attorneys.