Self-employment tax calculator

While there are some very real benefits to being a freelancer, contractor or business owner, it's important to know that your taxes are more complicated than they are for salaried workers. That's because independent contractor taxes are not automatically withheld like they are for salaried workers. Self-employed individuals are obligated to pay a 15.3% self-employment tax, which covers Social Security and Medicare taxes.¹ Salaried workers split this responsibility with their employer in the form of FICA tax.

A self-employment tax calculator can be a useful tool for overcoming the challenge of a more complex tax scenario. To use the tax calculator below, you will need the following information:

  • Self-employment income (or expected 1099 income)
  • Employer paid income
  • Location
  • Tax filing status

What is self-employment tax?

Let's start by gaining a better understanding of self-employment tax. As already mentioned, it includes both Social Security and Medicare taxes, with 12.4% going toward Social Security tax and 2.9% toward Medicare. Salaried employees split these costs with their employer, but independent contractors are both the employee and the employer, and so they must pay it all.1

Who has to pay self-employment tax?

The IRS indicates that sole proprietors or independent contractors must pay self-employment tax and file Schedule SE if either of these apply2:

  • Your net earnings from self-employment (excluding church income) were $400 or more
  • You had church employee income of $108.28 or more

These rules apply regardless of taxpayer age – even if you're already receiving Social Security or Medicare. IRS Schedule C is used to calculate your net earnings while IRS Schedule SE is used to calculate how much self-employment tax you owe. Not sure if you're self-employed? According to the IRS, if you received a 1099 form instead of a W2, you are considered self-employed.

How to calculate self-employment tax

According to NerdWallet, the process of calculating self-employment tax begins with calculating your annual net earnings from self-employment. Net earnings are usually your gross income (from self-employment) minus any business expenses. Roughly 92.35% of your self-employment earnings will be subject to self-employment tax. Once you know how much of your net earnings are subject to tax, it's time to apply the 15.3% additional tax rate.1

NerdWallet and the IRS both also note that  a 0.9% Medicare tax may be added to net earnings that exceed $200,000 for single filers or 250,000 if you file jointly. For 2020, only the first $137,700 will be subject to the Social Security portion of self-employment tax, an increase of the 2019 amount of $132,900.2 Learn more about how to calculate self-employment tax.

To pay self-employment tax, you will need a Social Security number or an individual taxpayer identification number. You will also need to file your estimated taxes on a quarterly basis. That means making estimated quarterly payments throughout the year rather than waiting to April to pay, according to the IRS website.2

Tax deductions available for self-employment

Despite the additional complications associated with paying self-employment tax, there is some good news. According to NerdWallet, certain tax deductions are available to help self-employed individuals save money. For instance, the home office deduction allows independent contractors who work from home to deduct a portion of their mortgage or rent, property taxes, utilities, and repairs and maintenance. Self-employed individuals can deduct office expenses, wear and tear on their car, phone and internet costs, business travel and meals, and more.3

What's interesting is that the self-employment tax is itself a self-employment tax deduction. In other words, you can deduct half of your self-employment tax on your income taxes. Although you will need to pay the tax when it's due during the year, it will be deductible on your 1040 at tax time, also according to NerdWallet.3

Now there's also the qualified business income deduction which allows self-employed individuals and business owners to deduct a portion of their business income on their taxes. This is for people who have pass-through income, or business income they report on their personal tax return, such as sole proprietorships, partnerships, S corporations and limited liability companies, as explained by NerdWallet.3

If you're self-employed, it's important to estimate what you may be expected to pay in taxes, especially because you will need to pay those taxes as you earn the money throughout the year. In the meantime, help protect your business with these business insurance products from Nationwide.

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1"Self-Employment Tax: Understand & Calculate It in 2020," https://www.nerdwallet.com/blog/taxes/self-employment-tax/ (Sept. 24, 2020).
2"Self-Employment Tax (Social Security and Medicare Taxes)," https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes (accessed Nov. 22, 2020).
3"15 Big Self-Employment Tax Deductions in 2020-2021," https://www.nerdwallet.com/article/taxes/self-employment-tax-deductions (Nov. 22, 2020).

The information contained in this blog was obtained from sources believed to be reliable to help users address their own risk management and insurance needs. It does not and is not intended to provide legal advice. Nationwide, its affiliates and employees do not guarantee improved results based upon the information contained herein and assume no liability in connection with the information or the provided suggestions. The recommendations provided are general in nature; unique circumstances may not warrant or require implementation of some or all of the suggestions. Nothing in this brochure is intended to imply a grant of coverage.