Self-Employment Tax 2016: What You Need to Know

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:

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