Understanding Self-Employment Taxes

• Key Components:
  • Social Security Tax: 12.4% of your net earnings up to a certain limit.
  • Medicare Tax: 2.9% of your net earnings.
    • Additional Medicare Tax: 0.9% on net earnings above a certain threshold (varies by income level).

• Self-Employment Tax Deduction: You can deduct 50% of the self-employment tax paid from your taxable income. This deduction reduces your income tax liability but does not directly impact the amount of self-employment tax you owe.
• Business Expenses: Deduct legitimate business expenses, such as:
  • Home Office Deduction: If you use a portion of your home for business purposes.
  • Travel Expenses: Mileage, lodging, and meals while traveling for business.
  • Equipment and Supplies: Computers, software, tools, and other business-related purchases.
  • Professional Fees: Fees paid to accountants, lawyers, and other professionals for business-related services.

1. Determine your net earnings from self-employment: Calculate your gross income and subtract your allowable business expenses.
2. Calculate your self-employment tax: Multiply your net earnings by the self-employment tax rate (15.3%).
3. Consider the self-employment tax deduction: Deduct 50% of the self-employment tax from your taxable income.
4. Factor in estimated income tax: Calculate your estimated income tax liability based on your income and deductions.
5. Make estimated tax payments: If you expect to owe more than $1,000 in taxes, you'll need to make estimated tax payments to the IRS throughout the year to avoid penalties.

• Tax laws and regulations are subject to change. It's essential to stay informed about the latest tax updates.
• Consult with a tax professional: For personalized guidance and to ensure you're complying with all tax regulations.