What is US Self-Employment Tax: The Ultimate Guide

Self-employed individuals typically enjoy greater flexibility and autonomy when it comes to their trade or business. However, it also means they have to do their own taxes rather than relying on their employer to do it for them.

Where countries worldwide are offering digital nomad visas with lucrative tax advantages for location-independent workers, the US is entirely the opposite.

The taxes to keep track of are numerous and often can’t be dealt with without the help of a professional tax advisor. If you do miss one, you can expect a heavy penalty. Moreover, most taxes can’t be filed online.

Getting a Plan B for your business and personal life makes sense, helping you to diversify your portfolio, create generational wealth, and give you greater freedom. 

If you want to acquire the personal and financial freedom most people associate with a self-employed person, set up a call with us. We will help you go where you’re treated best.

Who Is A Self-Employed Person?

For IRS tax purposes, you’re considered a self-employed individual if:

• You work as a sole proprietor or an independent contractor.
• You’re a member of a partnership.
• You do contractual or part-time work.

What is The US Self-Employment Tax?

Brief Background

In 1935, the Federal Insurance Contribution Act (FICA) established certain taxes to fund Social Security and Medicare. That’s why, when you receive your paycheck, it’s missing some amount compared to your total salary. That amount is withheld to pay the FICA tax. The FICA tax burden is split between an employee and an employer, who each pays half of it.

The FICA tax rate is 15.3% – both employer and employee pay 7.65% each.

However, the FICA tax code wasn’t clear on the tax obligations of self-employed individuals. That’s why, in 1954, the US government passed the Self-Employed Contributions Act (SECA).

Self-Employment Tax – Definition

Self-Employed Contributions Act (SECA) required self-employed individuals to pay the self-employment tax. The self-employment tax rate is 15.3%, and the self-employed individual pays it whole (as opposed to 7.65% for regular employees).

The self-employment tax rate is the sum of the Social Security Tax (12.4%) and Medicare Tax (2.9%). Self-employment tax applies to the net earnings (profit) of self-employed individuals. You may need to pay self-employment taxes throughout the year.

US Self-Employment Tax Rate for 2023

The self-employment tax rate is 15.3% – 12.4%, of which are Social Security taxes, while 2.9% are Medicare taxes. It applies to the net earnings of self-employed people.

Net earnings over a certain threshold the government sets are not subject to the Social Security tax. Unlike the Social Security tax, Medicare taxes apply to all your net earnings regardless of how much you earn. Self-employed individuals must keep the following points in mind:

• Self Employment tax is not income tax.
• For 2023, the first $160,200 of earnings is subject to the Social Security portion.
• An additional 0.9% Medicare tax may apply if net earnings exceed the following:
  • $200,000 (for a single filer)
  • $250,000 (for joint filers)

Self Employment Tax Deductions

Self-employed individuals qualify for several tax deductions. Some of them are mentioned below:

• According to the IRS, when calculating your adjusted gross income, you can deduct the employer half (7.75%) of your self-employment tax. Simply put, the IRS considers the employer portion (7.65%) as a deductible expense, subjecting only 92.35% of your net earnings to self-employment tax.
• Self-employed individuals can also qualify for an income tax deduction according to the cost of health insurance.
• You may also qualify for a business income deduction, allowing you to take an income tax deduction for up to 20% of your self-employment income.
• You can deduct half of your self-employment tax from your adjusted gross income and decrease the total amount of payable taxes.

How To Calculate Your Self-Employment Tax?

To calculate your self-employment tax, you must first calculate your net earnings. You can calculate your net earnings by subtracting any deductions, like business expenses, from your gross income.

• 7.65% of your self-employment tax is generally considered a deductible expense, subjecting only 92.35% of your net earnings to self-employment tax.
• Once you’ve determined your taxable net earnings, apply the 15.3% tax rate.
• For 2023, the first $160,200 of earnings is subject to the Social Security portion.

Who Has To Pay US Self-Employment Tax?

You must pay self-employment tax if you meet any of the following conditions:

• Your net earnings from self-employment (not including church employee income) were $400 or more.
• You had $108.28 or more in income from church employment.

The self-employment tax rules apply no matter how old you are and even if you’re receiving Social Security or Medicare.

You may be considered self-employed for IRS tax purposes if you received a 1099 form from an entity you worked for.

How To Pay Self-Employment Taxes in the US?

Typically, you use Schedule C to calculate your net earnings from self-employment and Schedule SE to calculate your payable self-employment tax.

Moreover, to pay self-employment tax, you must provide your Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN).

As a self-employed individual, you may need to make quarterly estimated tax payments if you expect:

• You’ll owe at least $1,000 in federal income taxes this year, even after accounting for your refundable and withholding credits and
• Your withholding and refundable credits will cover less than 90% of your tax liability for this year or 100% last year – whichever is smaller.

Estimated taxes are used for self-employed people since they don’t have an employer to withhold their taxes. You must use Form 1040-ES (Estimated Tax for Individuals) to file these quarterly payments.

Typically, estimated taxes must be paid by the 15th of April, June, September, and January. These dates shift to the next business day if the 15th falls on a weekend or a holiday.

Is the US The Best Jurisdiction For Self-Employed Individuals?

15.3% – that’s the self-employment tax rate in the US. Compare that to the 1-3% tax rate in Georgia (a European country, not the US state) for individual entrepreneurs or the 0% tax rate in the Cayman Islands, and you’ll realize how good non-US entrepreneurs have it.

They don’t need to worry about filing tons of tax forms and spending much of their income on taxes. Instead, they can focus on expanding their business by investing their profits in high-yield ventures or back into their business.

We haven’t even started on the ever-increasing pool of digital nomad visa countries that offer tax-free lifestyles, tons of networking opportunities, and the free vibe you want as a self-employed individual.

The US has much to offer to the right person, but that doesn’t mean that you don’t try to go where you’re treated best.

At Nomad Capitalist, we’ve helped our clients go to 31 tax-friendly jurisdictions. Their only regret? “Why didn’t we do it sooner.”

If you want to achieve what they have, set up a call with us today.

What is US Self-Employment Tax in 2023: The Ultimate Guide FAQ