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You may need to pay self-employment tax if you’re a freelancer, independent contractor or small-business owner. Here’s what self-employment tax is, how it works and how you can save.
Note: As part of the government's ongoing response to COVID-19, recent legislation provides unemployment benefits, emergency funds, retirement account withdrawals, and loans and relief for the self-employed, including “gig workers.” Read more about what's available . You can also read our , which has answers about , debt relief, changing travel policies and managing your finances.
The self-employment tax rate is 15.3%. That rate is the sum of a 12.4% for Social Security and 2.9% for Medicare. Self-employment tax applies to net earnings — what many call profit. You may need to pay self-employment taxes throughout the year.
As noted, the self-employment tax rate is 15.3% of net earnings. That rate is the sum of a 12.4% Social Security tax and a 2.9% Medicare tax on net earnings. Self-employment tax is not the same as income tax.
Calculating your tax starts by calculating your net earnings from self-employment for the year.
In general, you have to pay self-employment tax if either of these things are true during the year:
The tax rules apply no matter how old you are and even if you’re receiving Social Security or are on Medicare.
You can deduct half of your self-employment tax on your income taxes. So, for example, if your Schedule SE says you owe $2,000 in self-employment tax for the year, you'll need to pay that money when it's due during the year, but at tax time $1,000 would be deductible on your 1040.
Self-employment can score you a bunch of sweet tax deductions, too. One is the qualified business income deduction, which lets you take an income tax deduction for as much as 20% of your self-employment net income. () Plus, there are other deductions available for your home office, health insurance and more. .