What is self-employment tax in the United States?

Self-employment tax is a tax that is imposed on individuals who work for themselves and are not considered employees of a company. In the United States, self-employment tax is also known as the "SE tax" and is a combination of Social Security and Medicare taxes.

Self-employed individuals are responsible for paying both the employer and employee portions of Social Security and Medicare taxes, which are usually paid by employers for their employees. For tax year 2022, the self-employment tax rate is 15.3% of your net earnings from self-employment, with 12.4% going to Social Security and 2.9% going to Medicare.

However, the self-employment tax only applies to net earnings from self-employment above a certain threshold. For tax year 2022, the threshold is $400. This means that if your net earnings from self-employment are below $400, you are not required to pay self-employment tax.

Self-employment tax is calculated and reported on Schedule SE (Form 1040) when you file your federal income tax return. It's important to keep track of your business income and expenses throughout the year and make estimated tax payments to avoid underpayment penalties.

Overall, self-employment tax is an important consideration for individuals who work for themselves and is an important source of funding for Social Security and Medicare programs.

If you run a payroll for your employee, you deduct 6.2% social security and 1.45% Medicare from the each pay of your employee. As an employer you also contribute an equal amount of social security and Medicare. Please refer to our blog “US payroll processing” for more information.

When you are self-employed as a small-business owner, freelancer, independent contractor you need to pay to pay the above taxes as well. Since you are an employee for your business and also an employer, you need to pay both the share of employee and employer. This payment is called self-employment tax. Hence you pay 12.4% social security and 2.9% Medicare on your net earnings.

You report your net earnings on Schedule C and calculate your self-employment tax on Schedule WE. You may need to estimate this tax and pay on a quarterly basis.