Tax
Self-employment tax
Social Security and Medicare tax paid by someone who works for themselves, covering both the employee and employer halves.
Also called SE tax, SECA.
An employee pays 7.65% of wages toward Social Security and Medicare and their employer pays another 7.65%. Someone self-employed is both, so the rate is 15.3%. It is a tax on net profit, and it applies before any income tax does.
It is not charged on the whole profit. The base is 92.35% of net profit, which approximates the employer half that an employee never has counted as their own wages. Half of the resulting tax is then deducted against income tax.
The Social Security portion stops at the annual wage base; the Medicare portion never does. If you also have a job, the wages from that job fill the wage base first, so the Social Security part of your self-employment tax can be reduced or eliminated entirely.
In Contha
This is the single most common reason a first-year freelancer’s tax bill is roughly double what they expected. Contha computes it on the real base, and accounts for wages from a job rather than pretending the business is your only income.
Related
Terms that come up beside this one
Schedule C
The form a sole proprietor files with their personal return to report a business’s income and expenses.
Quarterly estimated tax
Tax paid in four instalments during the year by people whose income is not subject to withholding.
Social Security wage base
The annual cap on earnings subject to Social Security tax, above which only Medicare tax applies.