If you’re self-employed, you need to have a game plan when it comes to payroll. Self-employed individuals are responsible for withholding and remitting different taxes than other workers. If you want to ensure you’re compliant, learn more about self-employed payroll.
Read on to discover the ins and outs of self-employed payroll, including how to calculate self-employed payroll taxes and what steps to follow.
Self-employed payroll
Self-employed individuals are people who own their own businesses and work for themselves. You are typically considered self-employed if you are a sole proprietor, independent contractor, or if your business is unincorporated.
You are self-employed if your business is structured as a:
- Sole proprietorship
- Partnership
- Limited liability company (LLC)
Owners of corporations, as well as partnerships and LLCs taxed as corporations, are not considered self-employed.
Payroll options for self-employed individuals
Depending on a company’s business structure, self-employed individuals might pay themselves with:
Some of these payment methods might be more time-consuming than others. However, you have a few options when it comes to self-employed payroll.
Self-employed individuals can handle payroll by hand, use payroll software, or hire a bookkeeper to do it for them.
Self-employed payroll taxes
Now that you’ve learned about self-employed individuals, it’s time to break down what kind of payroll taxes self-employed individuals need to pay.
You must pay self-employment tax if your net earnings from self-employment are more than $400 during the year.
So, what’s self-employment tax? Self-employed individuals must withhold and pay self-employment tax to cover their liabilities.
Self-employment tax includes Social Security and Medicare taxes, otherwise known as FICA tax.
The self-employment tax rate is 15.3% of your earnings. Take a look at how self-employment tax breaks down.
Breaking down self-employment tax
Self-employment tax is the same as paying both the employee and employer portions of FICA tax (7.65% employee portion + 7.65% employer portion = 15.3% total).
Of the 7.65% rate, 1.45% goes toward Medicare tax and 6.2% goes toward Social Security tax.
When it comes to self-employment tax, 12.4% (6.2% x 2) goes toward Social Security tax and 2.9% (1.45% x 2) goes toward Medicare tax.
On top of calculating your self-employment tax, you also have to keep a wage base in mind.
The Social Security wage base for 2023 is $160,200. Once you earn above the wage base, stop contributing the 12.4% Social Security tax portion.
There is no wage base for Medicare tax. However, you must withhold an additional Medicare tax if you earn above the threshold.
The additional Medicare tax rate is 0.9%. Withhold an additional 0.9% for Medicare tax if you reach one of the following thresholds:
- Single: $200,000
- Married Filing Jointly: $250,000
- Married Filing Separately: $125,000
- Head of Household With Qualifying Person: $200,000
- Qualifying Widow(er) With Dependent Child: $200,000
When you earn more than one of the above thresholds, your Medicare tax rate becomes 3.8% (2.9% + 0.9%).
Calculating self-employment tax
Calculating self-employment tax is simple. Multiply your taxable wages by 15.3% to find your self-employment tax liability.
Keep the Social Security wage base and the additional Medicare tax rate in mind when you calculate your self-employment tax.
Remember the following rates when calculating your self-employment tax:
- 15.3% self-employment tax rate up to the Social Security wage base
- 2.9% self-employment tax rate on earnings after the Social Security wage base
- 3.8% self-employment tax rate on earnings after $200,000 (single)
Self-employed payroll steps
Now that you know what your tax liabilities look like as a self-employed individual, you’re ready to complete the self-employed payroll steps.
Use the five steps below to complete your self-employed payroll:
- Determine how much to pay yourself
- Choose a pay frequency (e.g., weekly)
- Decide on a payroll method
- Calculate self-employment tax
- Pay self-employment tax
1. Determine how much to pay yourself
Before you can begin self-employed payroll, you need to determine how much you will pay yourself.
Depending on your business structure and role, you might decide to pay yourself using dividends or distributions versus a salary. Some self-employed individuals use a mixture of payment types (e.g., salary and dividends).
Keep in mind you might be better off paying yourself using a different method depending on how your business is organized.
How much you pay yourself might also depend on your business’s cash flow. Before you decide how much to pay yourself, think about your business’s revenue and factors that impact incoming cash.
2. Choose a pay frequency
If you opt to pay yourself a set salary, you must determine your pay frequency. Pay frequency options typically include:
- Weekly: 52 paychecks/year
- Biweekly: 26 paychecks/year
- Semi-monthly: 24 paychecks/year
- Monthly: 12 paychecks/year
Consider things like your business’s cash flow and industry before you decide on a frequency. Also, check with your state to ensure you’re compliant with pay frequency laws.
3. Decide on a payroll method
Again, you have a few options when it comes to self-employment payroll. You can:
- Do payroll by hand
- Hire an accountant
- Use payroll software
Doing payroll by hand is a cheaper alternative than outsourcing payroll or using payroll software. However, doing payroll manually also means calculating self-employment tax by hand. If you’re calculating self-employment tax by hand, make sure to double (and triple) check your calculations to avoid payroll problems down the road.
Hiring an accountant to do your payroll for you can be expensive. But, outsourcing your payroll gives you the ease-of-mind of knowing your payroll taxes are accurate. And, you don’t have to worry about handling self-employment tax deposits.
Using payroll software is a happy medium for self-employed individuals. You can enter your payroll information and it will handle the self-employment tax calculations for you. Plus, you can take advantage of full-service payroll software to handle the tax payments for you. Keep in mind that software can range in pricing, so it’s important to do your homework before deciding on a software.
4. Calculate self-employment tax
If you’re handling payroll by hand, you need to calculate your self-employment tax liabilities (discussed earlier).
If you are outsourcing your payroll or using payroll software, you do not need to worry about doing manual calculations. Instead, the self-employment tax is calculated for you.
5. Pay self-employment tax
If you’re responsible for paying your self-employment tax (e.g., not using full-service payroll or an accountant), you need to make sure you pay your tax liabilities on time.
To pay self-employment tax, you must have a Social Security number (SSN) or an Individual Taxpayer Identification Number (ITIN).
Many self-employed individuals pay their self-employment tax by filing quarterly estimated taxes. Estimated taxes include liabilities like self-employment and income taxes.
You can pay your estimated tax online, by phone, or by check or money order. Use Form 1040-ES, Estimated Tax for Individuals, to help you calculate your estimated tax liability and view payment information.
If you opt to pay your estimated taxes in one lump sum, your estimated tax is due by April 15 each year. If you choose to make estimated tax payments quarterly, your due dates are:
- 1st payment: April 15
- 2nd payment: June 17
- 3rd payment: September 16
- 4th payment: January 15
Payroll taxes don’t have to be complicated. Patriot’s Full Service payroll services handle filing and remitting your payroll taxes for you. Ready to streamline your payroll process and get back to your business? Get started with your self-guided demo today!
This is not intended as legal advice; for more information, please click here.
