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Self Employment Tax Vs. Income Tax - What's the Difference?

Written by a TurboTax Expert • Reviewed by a TurboTax CPAUpdated for Tax Year 2023 • May 13, 2024 10:56 AM
OVERVIEW

When you’re self-employed, you’re responsible for paying both the employer and employee portions of the Social Security and Medicare taxes. This is known as the self-employment tax. In addition, you’re required to pay a certain percentage of your taxable income as an income tax. Here’s how to calculate both taxes.

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Key Takeaways

  • FICA taxes are the taxes that are taken out of your paycheck to fund Social Security and Medicare.
  • Self-employment tax is a tax paid by self-employed individuals to cover the costs of Social Security and Medicare taxes that would normally be paid by an employer. 
  • Income tax is a percentage tax on a person’s taxable income, including income from wages, salaries, investments, and other sources.
  • Self-employed individuals are responsible for reporting their own income and paying their own taxes.

Self employment tax vs income tax

Self-employment tax is a tax that’s paid by self-employed individuals to cover the costs of Social Security and Medicare taxes that would normally be paid by an employer. This tax is calculated as a percentage of the individual's net earnings from self-employment.

Income tax, on the other hand, is a percentage tax on a person’s taxable income. This includes income from wages, salaries, investments, and other sources. The rate of income tax varies depending on the individual's filing status and income level. Generally, the higher the income, the higher the rate of income tax.

What is self-employment tax?

Self-employment tax is similar to a payroll tax that is paid by self-employed individuals to fund Social Security and Medicare. It is essentially the same as the Social Security and Medicare taxes that are withheld from the paychecks of wage earners. The purpose of self-employment tax is to ensure that self-employed individuals contribute to Social Security and Medicare, just like wage earners.

Self-employment tax is calculated on the net income of a self-employed individual. The current rate for self-employment tax is 15.3%, which is split between 12.4% for Social Security and 2.9% for Medicare. This rate is higher than the rate for wage earners, which is 7.65% (split between 6.2% for Social Security and 1.45% for Medicare).

All self-employed individuals are required to pay self-employment tax, unless their net income is below a certain threshold. For the 2023 tax year, the threshold is $400.

Who does the IRS consider self-employed?

The IRS considers self-employed individuals to be those who are in business for themselves, such as independent contractors, freelancers, and sole proprietors. These individuals are responsible for reporting their own income and paying their own taxes.

The categories/types of businesses in which the IRS classifies self-employed individuals include sole proprietorships, some partnership income, limited liability companies (LLCs) that elect to be taxed as a corporation, and farmers and ranchers.

Quarterly payments

Quarterly payments are payments made to the IRS on a quarterly basis to cover taxes owed on income or losses reported on a Schedule C or Schedule C-EZ. To calculate the amount of quarterly payments, you must first report your income or losses on the appropriate form. Then, you must calculate your Social Security and Medicare taxes using Schedule C or Schedule C-EZ. Finally, you must pay the taxes owed to the IRS on a quarterly basis. It is important to make these payments on time to avoid penalties.

What are income taxes?

Income taxes are taxes that are paid to the government based on the income you earn. They are usually withheld from your paycheck by your employer. The amount of income tax that is withheld from your paycheck is determined by the information you provide on your Form W-4. This form includes information such as your filing status, number of dependents, and other deductions you may be eligible for. Your employer will use this information to calculate the amount of income tax to withhold from your paycheck. This amount is then sent to the government to pay your income taxes.

TurboTax Tip:

Quarterly payments are payments made to the IRS on a quarterly basis to cover taxes owed on income or losses reported on a Schedule C.

Who pays income taxes?

As a taxpayer, you are required to pay income taxes on any income you receive, including wages, salaries, tips, bonuses, investments, and other sources of income. The amount of taxes you owe depends on the type of income, your filing status, and your income level. The government uses the money it collects from income taxes to fund government programs and services, such as roads, schools, and national defense.

How to calculate income tax

Income tax is calculated by taking your total income for the year and subtracting any deductions or credits you may be eligible for. Then, you will use the tax rate for your filing status to determine the amount of tax you owe. For example, if your taxable income is $50,000 and you are filing as a single taxpayer, you would multiply $50,000 by the tax rate for single filers (which is currently 10%) to get a total tax liability of $5,000. You would then subtract any deductions or credits you are eligible for to get your final tax liability. The TurboTax TaxCaster can help you estimate your income tax.

Federal tax brackets refer to the income levels at which different tax rates apply. The tax rate increases as income increases, so taxpayers in higher brackets pay a higher percentage of their income in taxes. The filing statuses used for federal income tax returns are single, married filing jointly, married filing separately, head of household, and qualifying surviving spouse with dependent child.

The different methods for calculating federal income tax withholding are the wage bracket method, the percentage method, and the aggregate method. The wage bracket method is the most accurate and is based on the taxpayer’s filing status, wages, and number of allowances claimed. The percentage method is simpler and is based on the taxpayer’s filing status and wages. The aggregate method is used for supplemental wages such as bonuses and is based on the taxpayer’s filing status, wages, and number of allowances claimed.

The TurboTax Tax Bracket Calculator can help you calculate your estimated tax rate.

What if I have both self-employment income and employment income?

When an individual has both self-employment income and employment income, they’ll need to file two separate tax returns: one for their self-employment income and one for their employment income.

  • For the self-employment income, the taxpayer will need to file a Schedule C form with their 1040 tax return. This form will report the income and expenses related to the self-employment activity. The taxpayer will also need to pay self-employment taxes on this income.
  • For the employment income, the taxpayer will need to report this income on a W-2 form. The employer should provide the taxpayer with this form. The taxpayer will then need to report this income on their 1040 tax return. The taxpayer will also need to pay federal and state taxes on this income.

The taxpayer should also be aware that they may be eligible for certain deductions and credits that can help reduce their overall tax liability. It is important for the taxpayer to research these deductions and credits to ensure that they are taking advantage of all available tax savings opportunities.

Taxpayers must pay income tax on all sources of income, including self-employment income:

  • Self-employment income is subject to both self-employment tax (SECA) for Social Security and Medicare, and FICA taxes collected by the employer.
  • Self-employment tax is a combination of Social Security and Medicare taxes that are normally withheld from an employee's wages by an employer.
  • As a self-employed individual, you are responsible for paying both the employer and employee portions of the tax. FICA taxes are also collected by the employer and are used to fund Social Security and Medicare. Self-employed individuals are responsible for paying both the employer and employee portions of the tax.

The Social Security tax is a payroll tax that is taken out of your paycheck and is used to fund Social Security benefits. The maximum amount of Social Security tax that can be taken out of your paycheck each year is set by the government. This maximum is known as the Social Security wage base. Once you reach this wage base, you will no longer have to pay Social Security taxes on any additional income you earn.

When it comes to taxes, FICA taxes are considered first, followed by self-employment taxes if the maximum Social Security wage base has not been reached. FICA taxes are the taxes that are taken out of your paycheck to fund Social Security and Medicare. Self-employment taxes are taxes that are paid by self-employed individuals to fund Social Security and Medicare.

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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

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  • Average Refund Amount: Sum of $3140 is the average refund American taxpayers received based upon IRS data date ending 02/17/23 and may not reflect actual refund amount received.

  • TurboTax Product Support: Customer service and product support hours and options vary by time of year.

  • #1 Best Selling Tax Software: Based on aggregated sales data for all tax year 2022 TurboTax products.

  • Deduct From Your Federal or State Refund (if applicable): A $40 Refund Processing Service fee may apply to this payment method. Prices are subject to change without notice.

  • Data Import: Imports financial data from participating companies; Requires Intuit Account. Quicken and QuickBooks import not available with TurboTax installed on a Mac. Imports from Quicken (2021 and higher) and QuickBooks Desktop (2021 and higher); both Windows only. Quicken import not available for TurboTax Desktop Business. Quicken products provided by Quicken Inc., Quicken import subject to change.

  • Audit Defense: Audit Defense is a third-party add-on service provided, for a fee, by TaxResources, Inc., dba Tax Audit. See Membership Agreements at https://turbotax.intuit.com/corp/softwarelicense/ for service terms and conditions.

All features, services, support, prices, offers, terms and conditions are subject to change without notice.

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