What Every Business Owner Needs to Know.
What Are Self-Employment Taxes?
Self-employment taxes consist of two components:
- Social Security Tax (12.4%) – Applied to net earnings up to an annual limit ($147,000 for 2022).
- 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:
- Self-employed individuals pay Social Security and Medicare taxes on net earnings.
- Some income types are exempt, such as dividends and certain rental income.
- S corporation distributions can reduce tax liability but require careful planning.
- 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.