The self-employment tax takes the place of payroll taxes for self-employed individuals who have no employer to pay the employer portion and withhold the employee portion. The self-employment tax equals the sum of both the employer and employee portions of the Social Security tax and the Medicare tax. However, the tax only applies to your net self-employment income, which is the amount you have left after accounting for your business expenses. Accurately figuring your self-employment tax helps you better budget for filing your tax return and making quarterly estimated payments.
1. Subtract your business expenses from your total self-employment income to find your net profit from self-employment. For example, if your tutoring business brought in $67,000 but you spent $13,000 on supplies and transportation, subtract $13,000 from $67,000 to find that your net profit equals $54,000.
2. Multiply your net profit by 0.9235, as of 2011. If the result is less than $400, you do not owe self-employment tax. In this example, multiply $54,000 by 0.9235 to get $49,869. This figure is your net earnings from self-employment.
3. Compare your net earnings from self-employment to the maximum income subject to Social Security tax for the year. In 2011, the maximum amount equals $106,800. If your net earnings from self-employment exceed the limit, multiply the net earnings by the Medicare rate and add the maximum Social Security tax for the year. Otherwise, multiply the net earnings by the self-employment tax rate. As of 2011, the tax rate equals 13.3 percent, but in 2012 the rate returns to the standard 15.3 percent. In this example, multiply $49,869 by 0.133 to find that the self-employment tax is $6,633.
- If you owe the self-employment tax, the IRS has traditionally allowed you to deduct half the amount from your income taxes, representing the equivalent of the employer portion of FICA taxes. However, in 2011, the employee portion of Social Security tax equals 6.2 percent while the employee portion equals 4.2 percent, so the IRS may allow you to deduct the employer portion rather than splitting it in half because the employee and employer portions are no longer equal.
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