Your Schedule C is done. On the one hand, your profit then will be tossed in with all your other income and you get to figure out your income tax. It's kinda long, ugly, a bit complicated. We'll save that for another article.
But now that you know your self employment income, you DO have all you need to know now to pay self employment tax.
Multiply your profit times .935 and then take that times .153. There you have it. That's your self employment tax. That was easy, right?
Self Employment tax?
THAT doesn't seem fair, does it? An extra tax for being self employed? What's up with that?
Let me put your mind at ease. There is no extra tax. But you do pay extra.
Okay, I suck at putting your mind at ease. Sorry.
Let me put it another way: The government isn't getting any extra money because of self employment tax. They're probably getting less when you think about it. So how does that work? And what is all this self employment tax about anyway?
Let's start with looking at an employee's paycheck
Most of us have been employees at some point in the game. Many of us still are employees somewhere, and the independent contractor thing is a side hustle. There may be a few who've never taken a traditional paycheck – I'd love to hear your story if that's you.
I can remember when I got my first paycheck. My first job in high school was at a Dairy Queen, making all of $2.65 per hour (which tells you I'm old as dirt, but that's another topic).
I knew the hours I worked, I knew how much I was making per hour, and I had a plan for every dollar I was going to get.
But wait…. something must be wrong. I didn't get as much as I thought. I look at the paystub and right away it's like…. who is this FICA person and why are they getting my money?
Did you ever have that kind of moment? You look at the paystub and see all the deductions and think of what you could have done with that money.
Tax deductions on a pay stub
It doesn't take long to learn that the government takes money out of your check right away when you are an employee. This is for two reasons:
- One, they don't want to wait until April 15 to spend our money.
- The other is, if they don't take it out early we are too likely to spend it before April 15, and now they have to work harder to GET our money.
Income tax is already top of mind for most of us.
That's what you usually think of when you say taxes, right? We're used to filing a tax form each year, and that's all about income tax.
And then there's state income tax, and maybe even some kind of local tax – everyone wants our money.
We often don't pay that much attention to the Social Security or Medicare deductions (other than wonder what FICA means when it shows up on the stub). We notice they took money out. Okay, but we didn't have to write a check. We didn't file forms.
Since that money never really goes into our pockets and thus never comes out of our pockets, we don't miss it. No check, no paperwork. No thought.
So why are we talking about Social Security and Medicare? I thought this was about self employment tax?
It's the same thing.
Your self employment tax is your version of Social Security and Medicare taxes that are taken out of a paycheck.
The thing is, because nothing is withheld from our payments as independent contractors, NOW we have to file that and NOW we have to make a payment. It's a lot of money to pay in if you're not ready for it.
Here's how it works. Social Security tax is 12.4% of your pay. Medicare is 2.9% of your pay. So for every thousand dollars you earn, the government gets $124 for Social Security and $29 for Medicare, totalling $153.
If you pay attention, you might have noticed they don't take that much out of your paycheck. That's because you only half to pay half of it. Your employer has to pay the other half.
However, when you are self employed, who gets to pay the employee half? You do.
Who gets to pay the employer half? Your employer – who happens to also be you.
You pay both halves. The government gets the same amount of money, but no one else is paying half of it for you.
You may have noticed a couple things about medicare and social security for employees.
Have you ever had a really tiny paycheck as an employee? I have to say, really tiny paychecks have been too much of the story of my life.
But anyway, you may have noticed that when the check is so small, there was no federal or state income tax money taken out. That's because you have to earn a certain amount of money before income tax kicks in.
But you probably also noticed that social security and medicare still came out. The check could have been $10 but Uncle Sam still got 62 cents for social security and 15 cents for medicare.
That is because the tax is due on every dollar you earn. There are no deductions or adjustments. You just owe that money. Period.
That's how it is with Self Employment tax. Once you've completed your Schedule C and determined what your business profits are, you have to pay the 15.3% Self Employment tax on every dollar.
Okay, there IS a small break: if you had less than $400 in self employment income the IRS doesn't require you to fill out a Schedule SE (the form you file to determine your self employment tax).
How Social Security and Medicare taxes work when you are a self employed delivery driver for Grubhub, Postmates, Doordash, Uber Eats and others.
Actually, this is pretty much how it works when you are self employed in any situation, it's not just tied to gig work.
Remember, Self Employment tax is charged based on your business profit, not on all the money you earn. That's the part that you figure out on Schedule C.
Technically all this is done on Schedule SE (for Self Employment) but it's pretty simple.
I say simple but the form looks anything but. There are a lot of lines that allow for other kinds of self employment income such as for some church workers and farm work. We're not going to get into those things because this is about gig worker self employment tax.
Here are the steps that you'll walk through on Schedule SE:
1. Multiply your income times .9235
What you're doing here is giving yourself a deduction of 7.65% from your taxable profits.
Why? This makes it fair. See, when an employer pays 1/2 of your social security and medicare tax, they get to write that off their profits. It's only fair that you get the right to do the same thing when YOU have to pay the employer part.
That's what you're doing here. You're reducing your income by the 7.65% you would pay.
2. Multiply that total by 15.3% to get your self employment tax.
On the form, the IRS has you multiply it by 12.4% (social security) and by 2.9% (Medicare) and add the two together. But it adds up to 15.3%
15.3% of that adjusted amount from Step 1 is your Self Employment tax.
Some notes about self employment tax:
Here's an example. Your Schedule C profit was $10,000.
Multiplying that by .9235 makes it $9,235.
15.3% of that $9,235 is $1,413. The $1,413 is the amount you'll have to pay in self employment tax.
What that ultimately means is your actual self employment tax is 14.13% of your Schedule C profits.
You should note that you don't have to pay self employment tax if your taxable profit is less than $400.
If less than $400, you don't owe self-employment tax; don't file this schedule unless you have an amount on line 1b.2019 IRS Schedule SE line 4
What should delivery drivers with gig companies like Doordash, Grubhub, Uber Eats, and Postmates take away from all this Self Employment Tax information?
I see two major take aways.
One is, track your expenses.
Track them well. Earlier articles in this series dove into more detail about this.
Remember that your self employment tax is based on your profit, not the money coming in. If you don't have a record of your expenses, you pay more in taxes.
John C. White, in his book “Income Tax Guide for Rideshare and Contract Delivery Drivers” (this is an affiliate link) defined it as the rule of 7. For every seven dollars in expenses that you track, you reduce your self employment tax by one dollar.
Did I mention to track your expenses?
Take this self employment tax stuff seriously.
It's easy to ignore it, since we've always been able to ignore social security and medicare tax.
But the deal here is, you don't get to apply standard deduction or any of that. The MOMENT you are making a profit, that profit is taxable as far as self employment tax goes.
If you're not aware of it, and especially if you're not saving for it, you can be in a LOT of trouble when tax day rolls around.
One of our last articles in the series is going to be about saving for taxes. Take that seriously. Save your money.
I'm writing this early in 2020. You may come across this while figurin out your 2019 taxes. I hope this helps you understand how your self employment taxes work, what they are for, and why they are what they are.
Even more, I hope this encourages you to start getting ready for future taxes by starting to save immediately.
Tax Guide: Understanding Your Income
The following three articles help you understand what your real income is as an independent contractor.
Tax Guide: Understanding Your Expenses
The following eight articles help you understand the expenses you can claim on your Schedule C. Most of these are about your car, your biggest expense.
Filling Out Your Tax Forms
Once you understand your income and expenses, what do you do with them? Where does all this information go when you start filling out your taxes?