Introduction

Being self-employed is exciting. You get to be your own boss, work on what you love, and have the freedom to set your schedule. But with that freedom comes responsibilities, especially when it comes to taxes. Unlike regular employees, you don’t have an employer to handle your tax withholdings. That’s on you.

One thing many self-employed people dread is the self-employment tax. This tax includes Social Security and Medicare payments, which are usually split between employers and employees. When you’re your own boss, you have to pay both parts.

But there’s good news! There are plenty of tax deductions that can help reduce the amount of tax you owe. In this guide, we’ll walk through some of the most common self-employment tax deductions. Whether you’re a freelancer, small business owner, or gig worker, these tips will help you understand how to save money come tax time.

What is Self-Employment Tax?

Self-employment tax is a special tax for people who work for themselves. It covers Social Security and Medicare, just like the taxes taken from regular employees’ paychecks.

For regular employees, their employer covers part of these taxes, and the employee covers the rest. But if you’re self-employed, you have to cover both parts, which is why it’s sometimes seen as high. The self-employment tax rate is 15.3%. This includes:

• 12.4% for Social Security
• 2.9% for Medicare

If your income goes over a certain amount (like $200,000 for individuals or $250,000 for married couples filing together), you may have to pay an extra 0.9% for Medicare.

The IRS requires self-employed people to file Schedule SE (Form 1040) to report and pay this tax. But don’t worry; you get to deduct half of your self-employment tax, which helps reduce your overall taxable income.

Understanding 2024 Tax Brackets

To effectively manage your taxes, here’s a simplified explanation of how U.S. tax brackets work in 2024:

• Progressive Tax System: The U.S. uses a progressive tax system, meaning your income is divided into portions, with each portion taxed at a specific rate.
• Starting Rates for Single Filers:
  • The first $11,600 of income is taxed at 10%.
  • Income from $11,600 to $47,150 is taxed at 12%.
  • From $47,150 to $100,525, the rate increases to 22%.
  • Higher brackets include 24% for $100,525 to $191,950, 32% for $191,950 to $243,725, and 35% for $243,725 to $609,350.
  • Any income above $609,350 is taxed at 37%.
• Married Filing Jointly: Brackets are broader for couples:
  • Income up to $23,200 is taxed at 10%.
  • The next range, $23,200 to $94,300, falls under the 12% rate, and so on, with higher thresholds doubling those for single filers.
• Important Note: Only the income within a specific bracket is taxed at that rate. For example, if you earn $50,000, only the portion above $47,150 would be taxed at 22%, while the rest is taxed at lower rates.

Understanding these brackets helps you estimate your tax liabilities and identify areas where deductions can reduce your taxable income.

How to Calculate Your Self-Employment Tax

Calculating self-employment tax might sound complicated, but it’s actually pretty simple. Here’s how you can do it in four steps:

1. Figure Out Your Net Income: First, subtract your business expenses from your total income. This gives you your net earnings.
   Net Income = Total Income - Business Expenses
2. Adjust for Taxes: The IRS lets you adjust your earnings by 7.65% to account for the employer's part of the taxes. So, your taxable income will be 92.35% of your net income.
   Taxable Income = Net Income x 92.35%
3. Calculate Your Self-Employment Tax: Multiply your taxable income by 15.3%. This will give you the amount you owe for Social Security and Medicare.
   Self-Employment Tax = Taxable Income x 15.3%
4. Take the Deduction: You can deduct half of your self-employment tax from your taxable income. This deduction helps lower the amount of income tax you owe.

Common Self-Employment Tax Deductions

Here’s where things get exciting: you can lower the amount of tax you owe by taking deductions. A deduction is a business expense that you can subtract from your total income, meaning you’ll pay less tax. Let’s look at some of the most common deductions.

1. Home Office Deduction

If you work from home, you may qualify for the home office deduction. This deduction is for people who use part of their home exclusively for business. Whether it’s a small room or a desk in the corner, if you use it only for work, you can deduct expenses like rent, utilities, and repairs.

There are two ways to calculate this deduction:

• Simplified Method: You can deduct $5 per square foot of your home office space, up to 300 square feet.
• Actual Expense Method: You can calculate the actual expenses of your home office, like how much of your electricity or rent goes toward your work space.

2. Vehicle Expenses

Do you use your car for business? If so, you can deduct some of your vehicle expenses. You have two options here:

• Deduct the actual expenses, like gas, repairs, and insurance.
• Or use the IRS standard mileage rate, which is 65.5 cents per mile for business miles driven in 2024.

Remember, you can only deduct the part of your vehicle use that’s for business, so it’s important to keep good records.

3. Health Insurance Premiums

If you’re self-employed and pay for your own health insurance, you can deduct the cost of your health insurance premiums. This includes insurance for you, your spouse, and your dependents. This deduction helps lower your adjusted gross income (AGI), which is great for reducing your tax bill.

4. Retirement Contributions

Planning for retirement? You can deduct contributions to retirement plans like a SEP-IRA or Solo 401(k). The more you contribute, the more you can deduct. For example, in 2024, you can contribute up to $66,000 to a SEP-IRA, depending on your income. These contributions are tax-deductible, which means you can save for the future while lowering your taxes.

5. Internet and Phone Bills

If you use the internet and your phone for business, you can deduct part of these bills too. Just make sure you only deduct the portion you use for work. For example, if you use your phone 60% of the time for business, you can deduct 60% of your phone bill.

Who Must Pay Self-Employment Tax?

Not everyone needs to worry about self-employment tax. Here’s who has to pay it:

• Freelancers: If you do freelance work (like writing, designing, or consulting), you must pay self-employment tax.
• Small Business Owners: If you run your own business, you’re responsible for paying self-employment tax.
• Gig Workers: If you work for apps like Uber or DoorDash, you’re self-employed and need to pay this tax.

In general, if your net earnings are $400 or more in a year, you’ll have to pay self-employment tax.

How to Pay Self-Employment Taxes

Paying self-employment taxes can be a bit tricky since no one is automatically withholding them for you. Here’s how to make sure you’re covered:

1. File Schedule C: Use Schedule C to report your business income and expenses. This will help you calculate your net earnings.
2. File Schedule SE: Use Schedule SE to figure out your self-employment tax.
3. Pay Estimated Taxes: Since taxes aren’t automatically withheld, you may need to pay quarterly estimated taxes. Use Form 1040-ES to calculate and submit these payments.

Read More: Understanding the Key Differences: Independent Contractor vs. Self-Employed (gloroots.com)

Maximizing Your Deductions with Gloroots

Managing self-employment taxes can feel overwhelming, especially if you’re juggling a global team of freelancers or contractors. That’s where Gloroots can help. We offer tools to help you hire, onboard, and pay your team across multiple countries; while keeping your business compliant with local tax laws.

With Gloroots, you’ll have everything you need to manage payroll, track deductions, and ensure you and your team are getting the most out of your self-employment tax deductions.

Conclusion

Being self-employed comes with a lot of perks, but it also comes with responsibilities, especially when it comes to taxes. By understanding how self-employment tax works and taking advantage of common deductions, you can lower your tax bill and keep more of your hard-earned money.

Need help managing your global team and staying on top of international tax laws? Gloroots is here to simplify the process. Get in touch today and see how we can make managing your global team a breeze.

‍