If you earned any income in 2015 that didn't have payroll and Medicare taxes deducted, you may have to pay an additional tax known as self-employment tax, which unfortunately can take another 15.3% out of your earnings. With that in mind, here are the details on self-employment tax so you'll know what to expect, and the best way to plan for next year.
What is self-employment tax? Self-employment tax is designed to account for the fact that self-employed individuals don't have Social Security and Medicare taxes taken out of their paychecks.
When you work most jobs, your earnings are taxed at a 6.2% rate for Social Security and 1.45% for Medicare. Additionally, your employer also contributes the same amount -- a total of 7.65% of your wages. However, when you're self-employed, you are the employer and the employee. Therefore, you're responsible for paying all of the Social Security and Medicare taxes, which adds up to 15.3%. This is the self-employment tax rate.
Any earned income up to $118,500 is subject to the Social Security portion of the self-employment tax and all of your earned income is subject to Medicare taxes. So, if you earned more than $118,500, only that portion is subject to Social Security tax.
Further, if your self-employment income is in addition to another job, you'll only have to pay Social Security tax on up to $118,500 in total income. For example, if you earn $100,000 from a full-time job and another $50,000 from a business you run on the side, only the first $18,500 of your self-employment income will be subject to Social Security taxes. However, the Medicare portion of the self-employment tax will still be applicable to the entire amount.
To learn more about paying self-employment tax, click here: