Self-Employment Taxes: What You Need to Know

by Guest Post


This guest post comes from Michael, a contributing editor of the Dough Roller, a personal finance and investing blog, and Credit Card Offers IQ, a credit card review site.

Earlier this year, I was fortunate enough to be able to leave my 9-5 job and work on my own as a contractor. Setting my own hours and not having to answer to anyone but myself has certainly proven to be a welcomed change.

But when I recently filed my 2009 tax return, I was hit hard by an unwavering truth: I was subject to pay self-employment taxes.

So just what are self-employment taxes, and are you subject to them?

  • If you earn more than $400, you are subject to self-employment tax
  • The first $106,800 of your net earnings is taxed for both social security and Medicare. Any additional earnings are subject to the Medicare tax only.

By no means would I consider myself savvy when it comes to the tax department, but year after year of being paid through an employer made me an expert of the 10-minute end-of-year tax return. One W-2, and a few deductions and credits later, I was on my way to a sizable tax refund.

This year, I spent more than 10 times as long preparing my tax return with H&R Block at Home tax software, and I was only contracting for a few months.

Now that I work from home, I am kindly asked by the IRS to pay a self-employment tax. I thought that when I left my office job, I left the days of paying for social security and Medicare behind, but I was sadly mistaken. Not only do I still have to pay those taxes, but I now have to pay twice as much for them!

A total of  12.4% of my net earnings will go toward social security and 2.9% of my net earnings will go toward Medicare. I’m already in the 25% federal income tax bracket, so this means that on paper, 40% of my earnings are going straight to Uncle Sam. That sucks!

To be fair, 40% is a little high because I’m not taking things like deductions, credits, the fact that only a portion of my earnings are taxed at 25% and the rest at 15% and other tax saving methods into consideration.

One of the cool rules of the self-employment tax is that I can deduct half of what I actually pay in self-employment taxes and apply that deduction to my net earnings before I pay the tax, so it’s not as bad as it could be. A quick example for those confused:

If I earned $10,000 in income, I would think that 15.3% of that ($1,530) will be lost to the Self Employment tax. But I can take half of that tax ($765) and deduct it from the original $10,000, leaving me a balance of $9,235. I then apply the 15.3% tax to the new amount, also known as your ?net earnings,? and learn that my actual self-employment tax is $1,413, resulting in a savings of $117. Not anything to write home about, but a savings never the less.

So what do I need to know now that I have to pay self-employment taxes every year?

  1. Each year, depending on the number of people I provide my services to, I need to collect Misc-1099 statements at the end of the year to file my taxes. 1099’s are the W-2’s of the contracting world and in order to avoid an audit, I need to make sure I report exactly what is on that form.
  2. Now that I started the year as a contractor, I should probably pay quarterly taxes rather than wait until the end of the year. If you think it’s a good idea simply to pay a year’s worth of payroll, federal and state income taxes once a year, think again. The IRS will levy a severe underpayment penalty for holding on to its money the entire year. Payments are to be made April 15th, July 15th, October 15th and January 15th (The January payment will be in the following fiscal year).
  3. Owning my own business, I will be keeping my eyes and ears open for every possible deduction to minimize the new taxes that I now need to pay. Previously, the standard deduction was all that I needed but those days are well behind me.
  4. Somehow, I need to realize that every check I receive for my work is not 100% mine to keep. A good chunk of that belongs to the government, so in order not to spend everything I make, I’ve decided to set aside an online savings account specifically for payment of IRS taxes. Four times a year, I will take money out of that account to pay my estimated taxes the other days of the year, that account does not exist!

Self-Employment taxes can certainly be a drag if you’re just getting started in a new business and have never heard of them before.

But when you’re 65 and reaping the benefits of social security (reaping may be exaggerated and that’s assuming there’s anything left that far in the future) you won’t be as upset that the IRS made you pay it.

{ 13 comments… read them below or add one }

Jon June 5, 2011 at 4:46 am

Well said

Jean June 8, 2011 at 4:16 am

First, I’d like to congratulate you for your decision to be ‘self-employed’ man.
This is a good post and I am sure it can help lot of readers who wish to (or have just started to) build their own business.

Todd @ AllThingsFinance May 30, 2013 at 3:32 am

Thanks so much Michael. I co-own two blogs right now and we’d like me to try working on them full time and see how big they can go. Combined, they provide about a full-time salary, but no benefits, and certainly they don’t account for increased taxes. This is all stuff I’ve got to chew through. Contemplating the risk with the opportunity to potentially earn more.

Auston October 21, 2014 at 9:06 pm


I am a salesman for a small local internet company and I am commissioned based. I am not considered an employee but rather a contracted employee. I do not own a business. I have been putting away 40% of all my checks into a savings account to pay my taxes at the end of the year. Should I be paying quarterly taxes? Also, what suggestions do you have for me to lessen my 40%?

Thank you for your post and I do hope to hear back from you.


Jason Unger October 23, 2014 at 2:10 pm


You should be paying quarterly taxes. Talk to your accountant (or get one) to help get set up for that.

Depending on your overall tax rate you’ll want to put aside anywhere from 25-40% each month for taxes.

Mike March 3, 2015 at 8:40 pm

Boy was this a head banger! I too started to make an extra dollar doing some remodeling for my brothers business. Out of the blue, I get a 1099 misc in the mail for $11,300.00. That pretty much means I owe $4,520 bucks to uncle sam. I never knew I would have to fork up so much and am sorry I tried to self employ. I have a house full of kids and little income. I feel screwed. This is certainly a lesson learned.

amber March 11, 2015 at 3:17 pm

That’s a big “if” on the social security. *sigh. It’s frustrating to pay so much with the almost certainty that it will not be there when I’m retirement age. My husband is 1099 and I’m W2 and I basically work to pay his taxes and our medical insurance. Very frustrating.

Paula April 1, 2015 at 12:22 am

Hi. Thanks for your article. Qq if I only make 20k year as self Employment and join together with my husband that make a chunk more. 150k with W2. Should I pay 15,3 + 25% quarterly? Thanks

Jeff May 23, 2015 at 6:43 pm

I am a contractor salesman for a software company. I have been paying quarterly taxes for a couple years now. However, I will soon be quitting and moving on to another position as a W-2 position. I will no longer be working as a contractor. Do I still need to pay my remaining quarterly estimates for the rest of the year?


Cornelius Minor June 27, 2015 at 9:06 pm

Exactly how do I set all this up? I’d like to be self employed, just don’t know how to get started.

Marsha May 23, 2016 at 10:26 pm

Would it save me more money if I paid quarterly or is it the same annually?

Wayne Bowman May 25, 2017 at 12:46 pm

If I own a small consignment shop no employees but myself and am 68 drawing SSI and on Medicare, do I still have to pay self employment taxes?

Darrell Baker October 5, 2017 at 10:31 am

Is it true if you pay all 2017 tax due by 1/31/18 you don’t need to send estimated payments?
I draw a pension with taxes withheld
Social Secutity nothing withheld
Thank you

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