Self-Employment Tax: What Is It, How to Calculate It, and When to Pay in 2023

Many people aspire to be their own boss. Setting their hours and making their own business decisions is liberation for some. You're no longer a tiny cog in the wheel!

But it also comes with increased pressure and responsibilities, taxes included. Now that you're self-employed, you'll have to pay your taxes directly to the IRS and make quarterly tax payments four times per year. And if you miscalculate, you could open yourself up to penalties and increased IRS scrutiny. 

Read on to understand self-employment taxes, how to calculate them, and when to pay them.

What is Self-Employment Tax?

Self-employment tax refers to taxes paid by an independent contractor that goes to the federal programs of Medicare and Social Security. 

Employers typically pay the Medicare and Social Security tax through FICA on their employees’ behalf. Employers withhold employee wages to pay one part of it, and they pay another portion themselves. 

Self-employed individuals must pay both of those portions on their own.

Self-Employment Tax Rate for 2022 and 2023

The IRS set the self-employment tax rate at 15.3 percent. That rate is the sum of two parts: A 12.4% Social Security tax rate and a 2.9% Medicare tax rate. 

Your self-employment income is subject to the Medicare tax, but higher incomes are not subject to the Social Security portion beyond a set point. In 2022, only your first $147,000 in earnings were taxed at the Social Security rate. For the 2023 tax year, the Social Security tax applies to your first $200,000 in self-employment earnings.

Who Has to Pay Self-Employment Tax?

Anyone with $400 or more in earnings from self-employment will be held liable for Social Security and Medicare taxes. 

If you work multiple jobs and have at least one employer withholding income for FICA payments, you may or may not need to pay additional taxes, which will depend on the relative income and the amount paid by your employer.

How to Calculate Self-Employment Tax

Your self-employment tax total is calculated according to your net income, including wages and tips. Assuming your income doesn't exceed the set thresholds, you will pay 15.3 percent of your net earnings in self-employment tax. 

How to File Self-Employment Taxes

You can pay self-employment taxes online through IRS Direct Pay. You can calculate and report your self-employment taxes with IRS Form 1040, Schedule SE. 

However, to make payments online, you must use your Social Security Number or an Individual Taxpayer Identification Number.  

Paying with a Social Security Number

If you’re eligible for a Social Security Number and card but don’t have one, you can apply for a number and card with the Social Security Office online. The government will use this number to identify you and your records for tax purposes.  

Paying with an Individual Taxpayer Identification Number

For individuals who need to pay taxes but are ineligible for a Social Security Number, you can register for an Individual Taxpayer Identification Number with Form W-7. 

Paying Self-Employment Tax with Estimated Taxes

When an employer pays taxes on your behalf, they don't wait until the end of the year to make payments. These taxes calculated according to income are supposed to be paid throughout the tax year as you earn the income. 

For independent earners, that means paying quarterly estimated taxes. You can pay quarterly estimated taxes online and calculate your estimated payments using IRS Form 1040-ES. 1-800Accountant created an easy-to-use quarterly estimated tax calculator that you can use to see estimated year-to-date quarterly tax payment liability.

If you want to avoid fines or penalties for underpayment, you should make your estimated payments according to these quarterly deadlines in 2023: 

• First Quarter Payment: April 18, 2023
• Second Quarter Payment: June 15, 2023
• Third Quarter Payment: September 15, 2023
• Fourth Quarter Payment: January 15, 2024

Tax Deductions for the Self-Employed

Handling these regular tax payments can be a significant financial burden for independent contractors, especially if they're not prepared. On the bright side, a wide variety of tax deductions available can help you increase your savings and balance some of the money you've lost to taxes. 

If you’re self-employed, you are legally operating your own business, which means you can claim many legitimate costs as small business tax deductions.  

Self-Employment Tax Deductions

While being self-employed subjects you to extra taxes, you can claim some tax payments as deductible business expenses. You can deduct the portion of your self-employment taxes that an employer typically pays from your adjusted gross income. 

Home Office Deduction

Many people work from home, but not everyone can claim a deduction for their home office. You can claim and deduct expenses related to your home office if it is your principal place of business. You must use a specific area of your home exclusively and regularly for work purposes. 

If you meet those requirements, you can count a proportional amount of your home costs as a business expense, including utilities, internet, and rent or mortgage payments. 

Health Insurance Premiums

Anything your employer would generally pay is likely eligible to be claimed as a tax deduction, including health insurance premiums.

As long as a spouse’s insurance plan cannot cover you, you can deduct the premiums for your health insurance or HMO from your taxable income using the self-employment health insurance tax deduction. 

Internet and Phone

Depending on what you do, your internet and phone use may be essential for your work. You can deduct a portion of the costs for those services according to their proportional business usage. 

Meals or Travel

If you travel exclusively for business purposes, you can claim all your lodging and travel costs as business expenses. 

Vehicle

If you use your vehicle for a business purpose other than driving to and from a workplace, you can deduct related costs according to its use. With careful records, you can keep track of all your vehicle costs and deduct the qualifying portion. 

A simplified option for deducting vehicle costs is to add up the miles you drive for business and deduct them according to the IRS’s standard mileage rates. 

Interest

While the principal on many loans can’t be deducted, you can deduct the interest on loans, including your home mortgage, even if you don’t have a home office.

Education

The IRS sees continuing education as a regular and necessary part of the job. Any money you spend to help you do your job better or keep up with industry developments is money you can deduct for education expenses. 

This also covers any fees you pay for professional publications or association memberships. 

Insurance

Do you have a separate insurance policy covering a workplace or work-related need? If so, you can claim those premiums as tax deductions as well.  

Workplace Operation

For those with an office separate from their home, you can deduct the rent and utilities for that office as work expenses. You can also remove any other costs related to maintaining your workplace. 

Whether you have a separate office or not, you can deduct costs for office supplies, software, or technology used exclusively for your business and most costs related to employees and staff.  

Startup Costs

The IRS also allows new businesses to claim deductions for startup costs. This includes many one-time expenses involved in setting up your workplace and establishing your work infrastructure.

Self-Employment Taxes Made Easy with 1-800Accountant

There are many opportunities to minimize your tax burden, and we urge you to take advantage of all that apply to you. Unfortunately, few self-employed individuals have the time or expertise to claim the savings they deserve. If that sounds like you, your best option to save money and avoid penalties is to work with the professionals at 1-800Accountant, America's leading virtual accounting firm for small businesses and self-employed individuals. We'll provide financial advisory, calculate your quarterly estimated taxes, and more, so you can focus on growth.