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Introduction to Self-Employment Tax in U.S.

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Introduction to Self-Employment Tax in U.S.

In the United States, an individual is generally considered self-employed if he or she operates as a sole proprietor or independent contractor, or as a member of a partnership carrying on a trade or business. Self-employment tax is levied on self-employment income earned by self-employed individuals during the tax year.

What is Self-Employment Tax?

Self-employment taxes are made up of the Social Security tax (old-age, survivors, and disability insurance) and the Medicare tax (hospital insurance).

(1)

Social Security tax

The Social Security tax rate is 12.4%. The Social Security tax payable by taxpayers in 2023 is limited to the amount of social security wage base for that year of US$160,200. The amount increased to US$168,600 for 2024.

If a taxpayer receives payroll taxes or railroad retirement taxes that are subject to the Federal Insurance Contributions Act (FICA), the Social Security wage base is reduced by the payroll amount for those taxes.

(2)

Medicare tax

All self-employment income is subject to Medicare tax of 2.9%.

When single taxpayers whose self-employment income exceeds US$200,000 will need to pay an additional 0.9% Medicare tax. If taxpayers married filing jointly the threshold amount is US$250,000.

Under these rules, a taxpayer’s self-employment tax rate is 15.3% (12.4%+2.9%) of the taxpayer’s self-employment income up to the Social Security wage base on the year. When the self-employment income exceeds the threshold amount of the year, the self -employment tax increased by 0.9% Medicare tax.

Who Must Pay Self-Employment Tax?

If you meet any of the following conditions, you must pay self-employment tax and file Schedule SE (Form 1040 or 1040-SR):

(1)	Your net earnings from self-employment (excluding church employee income) were $400 or more.
(2)	You had church employee income of $108.28 or more.

In general, if you are self-employed as a sole proprietor or independent contractor, Schedule C is generally used to calculate net self-employment income. If your income is subject to self-employment tax, Schedule SE can be used to calculate your net self-employment income. Before calculating net income, it is usually necessary to calculate the gross income subject to self-employment tax.

Example: Anne, a U.S. citizen holds a SMLLC, has US$125,000 in self-employment income during 2023 (assuming no other income or deduction). Her self-employment tax is computed as follows:

Label	Amount/Rate
Self-employment net earnings	US$125,000.00
Less: US$125,000 * 7.65%	-US$9, 562.50
Reduced self-employment net earnings	US$115,437.50
Tax rate on self-employment income (12.4% + 2.9%)	15.3%
Self-employment tax	US$17,661.94

Other Situations to be Noted

(1)	You can deduct the employer's share of the self-employment tax (7.65%) when filing adjusted gross income. This deduction only affects your income tax. It does not affect your net self-employment income or self-employment taxes.
(2)	If a U.S. citizen is employed by a foreign government or agency, or an international organization, the employer is exempt from Social Security taxes and the citizen is considered self-employed and subject to self-employment tax.
(3)	Non-residents of the United States are not subject to self-employment tax unless it is determined that they are covered by the U.S. Social Security system.
(4)	Taxpayers who pay self-employment tax are still required to calculate and pay personal income tax.

Reference:
https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes

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