What is Self-Employment Tax and What are the Rates for 2020?

Year after year, filing your business taxes and paying your self-employment tax is one of those constant headaches that never seem to get any easier (or any cheaper!). Not only is it a challenge to calculate, but the self-employment tax rate changes every year. Wondering what you’ll pay in self-employment tax 2020? Let’s take a closer look.

What does it mean to be self-employed?

For the purposes of taxes, the IRS considers you self-employed if you do not work for a specific employer who pays you a salary or wage. Self-employed people may also be considered independent contractors, and they conduct business directly with their clients.

The IRS may refer to the self-employed as independent contractors, sole proprietors of business, and individuals engaged in partnerships. If you’ve made more than $400 in net earnings from your self-employment (or $108.28 in church employee income), you’re considered self-employed for tax purposes.

What is the self-employment tax?

The self-employed tax is a special tax filing for self-employed individuals. These individuals must submit their taxes using the form 1040 Schedule through the IRS.

In a traditional employee relationship with a W2, the burden of paying Social Security and Medicare falls upon the employer. Since you are self-employed, you pay as both employee and employer.

What is the 2020 self-employment tax rate?

For 2020, the self-employment tax rate is 15.3% on the first $137,700 worth of net income, plus 2.9% on net income over $137,700. Since you’re paying both portions (for employer and employee) of Social Security and Medicare, the rate breaks down as follows:

• The employee’s portion of the Social Security tax, which is 6.2% of the first $137,700 of net income
• The employer’s portion of the Social Security tax, which is 6.2% of the first $137,700 of net income
• The employee’s portion of the Medicare tax, which is 1.45% of all net income (no cap or limit on net income)
• The employer’s portion of the Medicare tax, which is 1.45% of all net income (no cap or limit on net income)

Self-employment tax deductions

Since you are paying as both employer and employee for yourself, you pay more in taxes. However, the trade-off for this higher tax rate is the number of deductions and cuts you can take when calculating your self-employment tax 2020.

The most common 1099 tax deductions for the self-employed are:

• Educational expenses and materials
• Home office
• Travel
• Outrageous costumes (If you’re a performer)
• Office supplies and equipment
• Licenses and permits
• Work from other 1099 contractors
• Advertising and promotional materials

There are a variety of resources available that you can use to learn more about the self-employment tax 2020 and the deductions you can take as you carve out a piece of entrepreneurship for yourself.