What’s the Self-Employment Tax?
The most important tax issue you need to be aware of when it comes to being in business for yourself is the fact that your net earnings are subject to self-employment tax, which is an additional tax, over and above income taxes.
When you work for someone else as an employee and receive a W-2, the amount of your paycheck is called “Net Pay”, as several taxes have been taken out and paid to the government on your behalf. FICA and Medicare taxes are among those taxes taken out. Together, they amount to a little more than seven and a half percent of your gross pay. What most people don’t know is that their employer pays a matching amount on your behalf. That means that just over 15% of your gross pay is being paid into the FICA and Medicare system with every paycheck, half by you and half by your employer.
In an attempt to maintain the fairness of the tax system, you are not “off the hook” when it comes to paying those taxes just because you are self employed. But since you don’t have an employer to withhold them from your paycheck or even to pay a matching amount, you shoulder the burden of paying the entire amount yourself. This is called Self Employment tax and it is calculated in conjunction with your net business earnings at the time you file your tax return at the end of the year.
Note: Consult your tax professional to see if this fits your circumstances. This is not to be taken as tax advice. Please refer to our End User License Agreement.