Self-employment tax is an important part of the tax system for freelancers and other self-employed individuals. The self-employment tax rate is currently 15.3%, which is made up of two parts: Medicare taxes (2.9%) and Social Security taxes (12.4%). This fee is often the biggest federal tax liability for owners of large businesses with many employees. In addition to filing an annual tax return, you generally have to make quarterly estimated tax payments if you're self-employed. It's important to note that the self-employment tax rate is not the same as the highest marginal rate.
The highest marginal rate is currently 37%, plus 15.3% of FICA taxes for a total marginal federal tax rate of 55%. If you're employed by someone else, you don't need to pay self-employment tax on the income you earn from them if they withhold payroll taxes. When it comes to budgeting for taxes, many people who are new to self-employment are surprised by their tax bills at the end of the year because they realize that they are suddenly paying much more taxes as freelancers than as employees. To avoid this, I usually recommend that freelancers save between 20 and 30% of their income for Uncle Sam. To calculate the self-employment tax you owe, you can reduce self-employment income by half of the self-employment (self-employment) imposed before applying the tax rate. This number will then be used in Schedule SE (Form 1040), Self-Employment Tax, to calculate the amount of self-employment tax you should have paid throughout the year. It's important to remember that taxes are a pay-as-you-go agreement in the United States, so waiting until the annual tax filing deadline to pay self-employment tax can mean incurring late payment penalties.
Having extra money in your pocket is nothing more than a temptation to spend it all, and when it's time to pay taxes, many self-employed people wonder where they'll get the money to pay their taxes from the previous year. In conclusion, it's important for freelancers and other self-employed individuals to understand how self-employment tax works and how much they should be setting aside for taxes each year. The self-employment tax rate is currently 15.3%, and I usually recommend that freelancers save between 20 and 30% of their income for Uncle Sam.