Self-employment tax is the bane of existence for many sole proprietors. And it’s often a surprise to people who are new to self-employment — they file their tax return and find out that things often turn out much differently when you’re self-employed.
What is Self-Employment Tax?
Self-employment tax is the self-employed person’s version of FICA taxes (FICA taxes = Social Security and Medicare taxes).
Self-employed people account for self-employment tax on their personal tax return. As I attempted to explain in this post, to calculate self-employment tax, you do the following:
- Multiply your net self-employment income by 92.35% (.9235)
- Multiply that result by 15.3% to arrive at self-employment tax
Plan for It
So yes, this is effectively another 15% owed on top of any income tax you might owe. And if you didn’t make estimated tax payments during the year, you can be left in a world of hurt at tax time.
The reason this is such a surprise to people who are new to self-employment is, they are used to working at a job where the taxes are withheld from paychecks. When you’re self-employed, there’s no such thing as a salary or a paycheck, so your only “withholding” comes in the form of estimated tax payments, which is something most people who are new to self-employment have never heard of or dealt with before.
The best way to manage self-employment tax, aside from the obvious of finding all the deductions you can find, is to make estimated tax payments to help offset the blow.