How to Calculate Self Employment Tax If You Are Being Paid as in Independent Contractor

If you're currently working as an independent contractor or if you're considering a position as a contractor then you will need to consider the tax impact. Under the usual employer to employee situation, the employer pays 7.65% for social security and medicare taxes and the employee pays another 7.65% which is withheld directly from your paycheck. An independent contractor does not have social security or medicare tax withheld and is responsible for the employer and employee portion for a combined tax of 15.3%! Understanding this important to understand the true tax implications for an independent contractor.

Instructions

1. Determine how much you will be paid or anticipate being paid annually as an independent contractor. We will use this number as the base in calculating the self employment tax owed.

2. I will use an example figure of $100,000 as annual compensation for a contractor. The IRS allows you to deduct 7.65% as if you were your own employer in calculating self employment tax. Our first step is to take our annual income ($100,000) and deduct 7.65%. Here is the example: $100,000 - 7.65% ($7,650) = $92,350. Our self employment tax will be calculated on the $92,350.

3. Next we can calculate the self employment tax that we will owe. Self employment is the combination of social security tax of 6.2% and medicare tax of 1.45% for a combined 7.65%. The independent contractor pays both the employer and employee portion for a combined tax of 15.3%. Here is the tax on our example: $92,350 x 15.3% = $14,130.

4. The total self employment tax based on annual earnings of $100,000 equals $14,130. It's important to remember that this is the self employment tax only. In addition federal income tax will be owed on the $100,000 earnings.

Tips & Warnings

• The social security tax of 6.2% is on the first $106,800 of earnings. Anything beyond that amount is only subject to the medicare tax of 1.45%.