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What Is The Purpose Of The Self-Employment Tax?
Self-employment in America equates to independence with increased responsibility. One of those responsibilities is the self-employment tax. It helps the government pay for schemes such as Social Security and Medicare, both essential to retirement and medical benefits, if you are a gig worker, freelancer, or small business owner. Familiarity with this tax helps you budget your income better and plan your financial future.
What is Self-Employment Tax?
The self-employment tax is what people working for themselves contribute to support Medicare and Social Security. Such taxes are comparable to the Federal Insurance Contributions Act (FICA) levies being deducted straight from the salaries of average employees.
But self-employed individuals pay both parts since they have no one to share the expense with. The Internal Revenue Service (IRS) runs this tax; it appears on IRS tax forms including Form 1040 and Schedule SE.
Self-Employed Contributions Act (SECA) Tax?
The SECA tax, or Self-Employed Contributions Act tax, is legislation that outlines the way self-employed individuals should contribute to Social Security and Medicare. It is much like FICA, only it targets individuals not covered under a standard payroll system. The premise is to ensure that everyone, regardless of whether or not they are employed, contributes equally to public finances and governmental programs to help pay for healthcare and retirement.
Are Self-Employment Tax and SECA Tax the Same?
Yes, they are basically the same thing. The SECA tax is the official term used in United States law, while “self-employment tax” is the everyday way of talking about it. Both refer to how self-employed workers contribute to Social Security and Medicare (United States) through the IRS.
How the Self-Employment Tax Works?
The self-employment tax functions by imposing a flat tax rate on your net earnings—that is, your earnings after expenses. The overall rate is 15.3%:
- 4% for Social Security (United States)
- 9% for Medicare
If your earnings are over a certain level, there is an Additional Medicare Tax of 0.9%. This payment is devoted to helping fund social programs such as retirement and healthcare for the aged and disabled.
Who Must File Self-Employment Taxes?
If your self-employment housekeeper income is $400 or more per year, self-employment tax filing is required. This includes:
- Freelancers and gig workers
- Single owner
- Independent contractors
- Members of a partnership
- Limited Liability Company (LLC) owners are taxed like a sole proprietorship
You report these taxes with your income tax return, typically Form 1040 or Form 1040-SR together with Schedule SE.
What are the Estimated Self-Employed Tax Due Dates?
| Tax Year | First Payment | Second Payment | Third Payment | Fourth Payment |
| 2024 | April 15, 2025 | June 15, 2025 | Sept. 15, 2025 | Jan. 16, 2026 |
| 2025 | April 15, 2026 | June 15, 2026 | Sept. 15, 2026 | Jan. 15, 2027 |
What are Self-Employment Rates?
As mentioned earlier, the rate of self-employment tax stands at 15.3% as stated above. This is charged on your gross income after deducting business expenses. The economic policy under which such rates are included is meant to help provide funds for the public services of the nation.
How to Calculate Self-Employment Tax?
To calculate this tax, follow these steps:
- Add up all your business income
- Subtract business expenses to get net earnings
- Multiply net earnings by 92.35% (this is the amount that’s taxed)
- Multiply the result by 15.3%
This will give you the amount of tax you owe.
Example to calculate self-employment
Let’s say you made $50,000 from freelance work and had $10,000 in expenses:
- Net income = $40,000
- 35% of $40,000 = $36,940
- 3% of $36,940 = $5,652.82 self-employment tax
How to Deduct Self-Employment Taxes?
You can deduct a portion of your self-employment tax. You can deduct half the total amount in calculating your adjusted gross income when filling out Form 1040. This does not lower your self-employment tax that you have to pay, but it can decrease your tax in the US.
Special Considerations
Some people qualify for tax breaks or credits like the Earned Income Tax Credit (EITC) or Affordable Care Act health subsidies. These can lower your overall tax bill. If you’re part of a partnership, S corporation, or other structure, your rules might differ—check with a tax professional or use tools.
Example of the Self-Employment Tax
Imagine a gig worker who drives for ride-share apps and earns $60,000 in a year. After $15,000 in costs (car, gas, maintenance), their net income is $45,000. They’d calculate:
- 35% of $45,000 = $41,558
- 3% of $41,558 = $6,357.57 owed in self-employment tax
They can also deduct half of this—about $3,178—from their taxable income on Form 1040.
How Does an Individual Pay Self-Employment Tax?
You usually pay your tax when you file your tax return using Form 1040. But if you expect to owe more than $1,000, you should send estimated tax payments using Form 1040-ES every quarter. These keep you from owing a large sum at tax time and avoid penalties.
Payments help support:
- Social institutions
- Government aid programs
- Welfare spending
- And the broader economy of the United States
Final Thoughts
The self-employment tax is a key part of public finance. It helps fund Social Security, Medicare, and other vital government services. While it can feel like a big bite out of your income, it also helps build your future. By understanding how it works and using legal tax deductions, you can stay ahead.
Need help navigating your taxes? BIT Accounting is here to help you understand your tax needs, file on time, and find ways to save money—whether you’re a freelancer, small business owner, or side hustler. Let us take the guesswork out of your taxes!
FAQs
Do I still file a tax return if I only made a little money?
Yes, if you earned $400 or more, you must file and may owe self-employment tax.
What if I work part-time or have a side hustle?
You still need to pay taxes on that income. Even temporary work counts as self-employment.
Can I get a tax refund if I’m self-employed?
It depends. If your tax credits or deductions are more than what you owe, you might qualify for a tax refund.
Do I need a Social Security Number?
Yes, or an Individual Taxpayer Identification Number (ITIN) to file your taxes.
What if I can’t pay all at once?
The IRS allows payment plans to help you catch up over time.
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