When you're working for yourself, taxes look a little different—specifically, you'll encounter what's known as self-employment tax. Essentially, this tax covers Social Security and Medicare obligations for individuals who run their own businesses or work as independent contractors.
Typically, employers split these taxes with employees. But, as a self-employed individual, you're responsible for paying both portions: the employer's side and the employee's side. For 2023, this tax rate totals 15.3%: 12.4% for Social Security (applied to the first $160,200 of net income) and 2.9% for Medicare (applied to all net income).
Self-employment tax is calculated on your net earnings—your total business income minus allowable business expenses. To report and pay this tax, self-employed individuals usually file Schedule SE along with their annual tax returns (Form 1040).
To avoid surprises at tax time, it's wise to track your earnings, set aside money regularly, and consider making estimated quarterly tax payments throughout the year. Proper planning can reduce stress and help you remain compliant with tax regulations.
