Understanding Self-Employment Taxes For Small Businesses

What Every Business Owner Needs to Know.

What Are Self-Employment Taxes?

Self-employment taxes consist of two components:

1. Social Security Tax (12.4%) – Applied to net earnings up to an annual limit ($147,000 for 2022).
2. Medicare Tax (2.9%) – Applied to all net earnings without a cap.

Additional Medicare Tax:

If your net earnings exceed $200,000 (single) or $250,000 (married filing jointly), you pay an additional 0.9% Medicare tax on the excess, bringing the total to 3.8%.

Who Is Subject to Self-Employment Taxes?

You must pay self-employment taxes if you:

• Earn income on a 1099
• Operate as a single-member LLC or sole proprietor
• Are a general partner in a partnership
• Are an LLC member in a multi-member LLC
• Co-own a business entity taxed as a partnership

Income Not Subject to Self-Employment Taxes

• Personal investment income
• Hobby income
• Rental income (with some exceptions)
• Dividends and most interest income
• Gains from the sale of business property

Reporting Self-Employment Taxes

Use Form SE to report self-employment taxes along with your income taxes. Include them in your quarterly estimated tax payments.

Special Situations:

W-2 and Self-Employment Income:

If you earn both, calculate W-2 wages first. If W-2 earnings exceed the Social Security cap, no additional Social Security tax is due on your self-employment income.

S Corporation Distributions:

Income from S corporation distributions is generally not subject to self-employment taxes. However, shareholder-employees must receive a reasonable salary subject to payroll taxes.

Key Takeaways:

1. Self-employed individuals pay Social Security and Medicare taxes on net earnings.
2. Some income types are exempt, such as dividends and certain rental income.
3. S corporation distributions can reduce tax liability but require careful planning.
4. Self-employed individuals must make quarterly estimated tax payments to avoid penalties.

For more insights, visit our blog on tax planning for small businesses or Contact us for personalized advice.