A Startup’s Guide to Self-Employment Taxes: What Founders Need to Know

Starting your own business is an exciting venture, but it comes with responsibilities—one of the most critical being taxes. If you’re running a startup as a sole proprietor, freelancer, or partner in a business, you’re likely subject to self-employment taxes.

This guide breaks down what self-employment taxes are, who needs to pay them, and how to manage them effectively.

What Are Self-Employment Taxes?

Self-employment taxes are the contributions entrepreneurs make toward Social Security and Medicare. Unlike employees, who split these contributions with their employers, self-employed individuals pay both portions themselves.

The total self-employment tax rate is 15.3%:

• 12.4% for Social Security

• 2.9% for Medicare

  
  

Who Needs to Pay Self-Employment Taxes?

You must pay self-employment taxes if:

• You earn $400 or more in net self-employment income during the year.

• You’re a sole proprietor, freelancer, independent contractor, or partner in a business.

Even if you’re running your startup as a side hustle, these rules apply as long as your net income exceeds the $400 threshold.

How to Calculate Self-Employment Taxes

1. Determine Your Net Income: Start by subtracting business expenses from your total revenue.

2. Apply the Self-Employment Tax Rate: Multiply your net income by 92.35% to find the taxable portion, then apply the 15.3% rate.

   
   

Example:

If your net income is $50,000:

• Taxable portion = $50,000 × 92.35% = $46,175

• Self-employment tax = $46,175 × 15.3% = $7,065

This amount is in addition to any income tax you owe.

How to Pay Self-Employment Taxes

1. Quarterly Estimated Payments:

   Self-employed individuals must pay estimated taxes quarterly to avoid penalties. Due dates are:

   April 15

   June 15

   September 15

   January 15 (of the following year)

   
   

2. File with Your Annual Tax Return:

   Use Schedule SE (Form 1040) to calculate and report your self-employment tax.

   
   

Deductions to Reduce Your Tax Burden

Good news—self-employed individuals can take advantage of several deductions to reduce taxable income:

• Home Office Deduction: If you work from home, you can deduct a portion of rent, utilities, and internet.

• Startup Costs: Deduct up to $5,000 in eligible startup expenses.

• 50% of Self-Employment Tax: Half of your self-employment tax is deductible as an adjustment to income.

  
  

Self-Employment Taxes for LLCs and Corporations

• Single-Member LLCs: Treated as sole proprietors for tax purposes, so self-employment taxes apply.

• S Corporations: Owners can pay themselves a reasonable salary subject to payroll taxes, while distributions are not. This can reduce overall tax liability, but it requires proper setup and compliance.

  
  

Tips to Stay on Top of Self-Employment Taxes

• Keep Accurate Records: Track all income and expenses to calculate net income correctly.

• Set Aside Funds: Save at least 25-30% of your income for taxes to avoid surprises.

• Use Tax Software: Simplify quarterly payments and filing with tools designed for self-employed individuals.

• Consult a Tax Professional: An advisor can help you navigate deductions and compliance.

  
  

Final Thoughts

Self-employment taxes are an unavoidable part of running a startup, but with proper planning and understanding, they don’t have to be overwhelming. Staying organized, making timely payments, and leveraging available deductions can significantly reduce your tax burden and keep your startup on track.

Are you prepared for self-employment taxes this year? Take action now to avoid surprises during tax season!