Is Self-Employment Tax Rate Higher? A Comprehensive Guide

When you're self-employed, you're responsible for paying both parts of the employment taxes, which totals 15.3%. However, you can request a deduction for part of this amount when filing your tax return. On average, people who are self-employed pay higher taxes due to the self-employment tax. That said, there are circumstances that can lead to people who are self-employed to pay lower effective taxes.

The self-employment tax is a tax that consists of Social Security and Medicare taxes, mainly for individuals. It's important to note that if you have a regular job in addition to your self-employment, you may be able to increase your federal tax withholding on that job to cover taxes on your income by self-employment. When calculating and paying your self-employment tax, it's important to remember that there are many tax deductions for homeowners that can also reduce their overall tax burden. Tax deductions reduce your taxable income, which in turn reduces the amount of taxes you owe by reducing your tax bracket, not by reducing your actual taxes.

An additional Medicare tax rate of 0.9% applies to wages, compensation, and self-employment income that exceed the threshold amount received in tax years beginning after December 31. Once you have your total net earnings from self-employment subject to tax, apply the 15.3% tax rate to determine your total self-employment tax. It's important to note that if you wait to pay the tax until the following April, when your annual tax return is due, the IRS may add a penalty. To avoid this, it's recommended that you make estimated tax payments throughout the year. Self-employed people must keep track of their own income and estimate the amount of taxes they owe. When properly exploited, those additional tax benefits can offset the increase in the self-employment tax and lead to a lower total effective tax rate.

Your net profit is then included in your personal income tax return and taxed the same way as your other income. Consulting a qualified tax advisor is highly recommended to make sure you're doing everything right when calculating and paying your self-employment tax. Tax software can help you identify cancellations that you might otherwise miss, streamline the filing process, and more easily identify your tax rate.