Self-employed individuals in the US must pay the self-employment tax, which includes Social Security and Medicare taxes. The tax rate is subject to change and must be paid throughout the year. If net earnings are $400 or more, the tax must be paid.
In the United States, the self-employment (SE) tax is the tax that is primarily levied on the self-employed—people who are self-employed. It is a Social Security and Medicare tax that is very similar to taxes withheld from the wages of people employed by another person or business – employees.
Sole proprietors, small business owners, and independent contractors are examples of freelancers. You can be self-employed and work part-time or full-time while working for you. Basically, if you work for yourself and someone else doesn’t pay their tax, you must pay this tax.
The self-employment tax rate is subject to change, but as an example, in 2010 it was 15.3%. Medicare represented 2.9% and Social Security the other 12.4%. The Social Security portion is based on the first $94,200 United States dollars (USD) the taxpayer receives as income. Therefore, the most an individual would pay in terms of this portion is $11,680 USD. The Medicare portion of the tax is not capped on the income on which it is based; It is based on the total income of the taxpayer. For both parts of the tax, the taxpayer’s income includes combined wages, tips, as well as net earnings.
To pay the self-employment tax, the taxpayer must have a Social Security number (SSN) or, alternatively, an Individual Taxpayer Identification Number (ITIN). SSNs can be requested to use Form SS-5. Nonresident aliens and resident aliens who do not have and are not eligible for an SSN will receive an ITIN from the Internal Revenue Service (IRS). ITIN applications can be made with a Form W-7.
The tax must be paid as you earn money throughout the year. You must make quarterly estimated tax payments if you think you owe tax. Quarterly payments must be made using Schedule SE (Form 1040).
If you are self-employed and your net earnings are $400 or more, you must pay self-employment tax. Also, if you are a church employee with income of just over $108 USD or more, you must pay the tax.
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