Unlike an employee, self-employed individuals do not have payroll taxes automatically deducted from compensation. However, the Internal Revenue Service (IRS) does require a self-employed person to pay a self-employment tax to cover Social Security and Medicare. Although not directly a payroll tax, as a self-employed person you may want to keep track of your self-employment tax liability to avoid owing the IRS a substantial sum of money when you make your quarterly tax payments.
1. Determine the gross amount of self-employed income for a specific pay period. For example, assume you earn $2,000 in self-employed income during a pay period.
2. Determine the current self-employment tax rate. Normally, the self-employment tax rate is 15.3 percent. However, the Tax Relief Act of 2010 temporarily reduced the self-employment tax rate to 13.3 percent. Assume that the current self-employment tax rate is 13.3 percent.
3. Multiply your self-employed income for the pay period by the current self-employment tax rate expressed as a percentage. Continuing the same example, $2,000 x .133 = $266. This figure represents your self-employed payroll taxes.
- The IRS only requires you to pay the Social Security portion of the self-employment tax on your first $106,800 of income.
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