What is Self Employment Tax? You Might be Paying too Much

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Wondering what is self employment tax? Check out this article and we’ll explain what it is, how to pay it, what tax forms to use and more.

Self employment is enjoyable and liberating for most people. However, there are a few differences when it comes time to do your taxes as a self employed individual versus an employee. In this article we discuss self employment tax, which is the tax that you pay in addition to your income tax.

Am I self employed?

First determine if you’re self employed. The simple answer is, you are self-employed if you are not on a payroll with a company. Some indicators that you are on a payroll of another company is that you receive regular pay checks as part of your salary followed by a W2 form at the end of the year. If you are self employed one of the tax forms you might receive from the people or companies that you work for at the end of the year is a 1099. Individuals that work as independent contractors, sole proprietors, freelancers, etc are considered to be self employed.

Check out the following articles for detailed information about self employed vs employed:

Independent Contractor vs Employee
What is a Sole Proprietorship

What is self employment tax

You pay self employment tax if you’re self employed. This is tax you pay in addition to your income tax. Self employment tax is also called ‘SECA’ tax, from the Self-Employed Contributions Act.

Self Employment Contribution Action (SECA 1954)
The Self-Employment Contribution Act (SECA) of 1954 is a tax law that requires small business owners to pay a tax of 15.3 percent of their self employment income. This tax is to cover Social Security and Medicare. Social Security includes Old Age, Survivors and Disability Insurance (OASDI)).

When you are an employee of a company (ie you’re not self employed) you only pay half of the amount for your Social Security, Medicare, Old Age Survivors and Disability Insurance (OASDI). The employee’s employer pays the other half. Also, self employment taxes are automatically taken from every paycheck. Whereas, you pay them when you do your taxes if you’re self employed. This means that the SECA requires self-employed to pay both the employer and employee portions of the Federal Insurance Contributions Act (FICA) tax. Therefore, when we mention self employment tax we are talking about only Social Security and Medicare taxes, not income taxes.

What is Federal Insurance Contributions Act (FICA) tax?
FICA tax are the contributions you make to Social Security and Medicare. Therefore, when we say FICA it means the same thing as saying Social Security and Medicare.

How do I pay self employment tax?

There are two ways to file and pay self employment taxes.

  1. On a Form 1040, for sole proprietorships you attach a Schedule C
  2. On a Form 1040 ES, also known as a Schedule SE

Please note that Form 1040 ES / Schedule C is for making estimated tax payments throughout the year. Estimated tax payments are made four times a year. Check out the following article for more information on estimated tax payments, What are Estimated Tax Payments and How do You Make Them?

IRS Form 1040 is for paying your taxes at the end of the year. On this form, you include your 1099-MISC (for 2020, 1099-NEC) income. If you earned income as a sole proprietor you attached a Schedule C. Read the following article for more information on the IRS Schedule C form, What is an IRS Schedule C Form (and What You Need to Know About it).

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Check out the following articles about Falcon Expenses features and services:

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