Your Guide to Self-Employment Tax and the Rates for 2021

Did you start your own business? Are you a freelancer, or a 1099 worker trying to make it through the pandemic? This guide is for you.

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. Are you wondering what you’ll pay in self-employment tax in 2021 with the new stipulations from the Coronavirus Aid, Relief, and Economic Security (CARES) Act? 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 2021 self-employment tax rate?

For 2021, the self-employment tax rate is 15.3% on the first $142,800 worth of net income (up from $137,700 in 2020). That rate is the combination of 12.4% for Social Security and 2.9% for Medicare. Since you’re paying both portions (for employer and employee) of Social Security and Medicare, the rate breaks down as follows:

Social Security tax: 

• The employee’s portion of the Social Security tax, which is 6.2% of the first $142,800 of net income
• The employer’s portion of the Social Security tax, which is 6.2% of the first $142,800 of net income

Medicare tax:

• 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)

The 2020 CAREs Act allows for the deferral and payment of the employer’s share of Social Security Tax. Additionally, recent changes made to the CAREs Act by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 make it so that eligible employers can more easily keep employees on the payroll and claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the wages they pay their employees between December 31, 2020 and June 30, 2021. For more information on these important developments, we recommend you regularly visit the IRS website to stay up to date on the newest rules and regulations.

For 2021, the self-employment tax rate is 15.3% on the first $142,800 worth of net income (up from $137,700 in 2020). That rate is the combination of 12.4% for Social Security and 2.9% for Medicare.

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 for 2021.

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

• Educational expenses and materials
• Home office (a specially important one in 2021)
• 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 in 2021 and the deductions you can take as you carve out a piece of the entrepreneurship pie for yourself, so don’t be afraid to ask questions and routinely do your own research.