Yes, if your net earnings from self-employment exceed $400 for the year, you must pay self-employment tax on those earnings, even if you’re already paying Social Security and Medicare taxes through your employer. However, if your total wages and self-employment income exceed the Social Security wage base ($168,600 for 2024), you won’t have to pay the Social Security portion of self-employment tax on earnings above that threshold. The Medicare portion still applies to all earnings with no upper limit. It’s important to note that your employment and self-employment incomes are considered separately for the Additional Medicare Tax threshold.

Simply forming an LLC won’t reduce your self-employment tax. By default, a single-member LLC is treated as a “disregarded entity” for tax purposes, meaning you’ll report business income and expenses on Schedule C, just like a sole proprietorship, and still pay self-employment tax on the profits. However, an LLC can elect to be taxed as an S corporation, which can potentially reduce self-employment taxes. With an S corporation, you pay yourself a “reasonable salary” subject to employment taxes (similar to self-employment tax), but additional profits can be distributed as dividends not subject to self-employment tax. This strategy requires careful planning, additional paperwork, and reasonable salary determination that can withstand IRS scrutiny. Consult with a tax professional before making this election, as the administrative costs and compliance requirements may outweigh the tax benefits for some businesses.

Yes, but only partially. As a self-employed individual, you can deduct the employer-equivalent portion of your self-employment tax when calculating your adjusted gross income (AGI). This deduction is equal to 50% of your self-employment tax and directly reduces your income subject to income tax, but not your self-employment tax itself. This deduction is available even if you don’t itemize deductions on your tax return. For example, if your total self-employment tax is $10,000, you can deduct $5,000 from your income when calculating your income tax. This deduction acknowledges that employed individuals don’t pay income tax on the employer’s portion of FICA taxes and provides some tax parity for self-employed individuals who must pay both the employer and employee portions of these taxes.

Self-employment tax is reported on Schedule SE, which is filed along with your Form 1040 tax return. You’ll first report your business income and expenses on Schedule C to determine your net self-employment income. Then, you’ll complete Schedule SE to calculate your self-employment tax liability. The tax is paid through quarterly estimated tax payments (using Form 1040-ES) and/or when you file your annual tax return. To make quarterly payments, you can use the Electronic Federal Tax Payment System (EFTPS), IRS Direct Pay, or mail in payment vouchers with checks. Most self-employed individuals need to make quarterly estimated tax payments if they expect to owe $1,000 or more in taxes when they file. Failure to make adequate quarterly payments can result in underpayment penalties, even if you pay the full amount due when filing your annual return.

Thorough record-keeping is essential for accurately calculating self-employment tax and substantiating deductions if audited. At minimum, you should maintain: (1) Revenue records – including all invoices, receipts, bank statements, and payment app records that show business income; (2) Expense records – receipts, canceled checks, credit card statements, and documentation for all business expenses; (3) Vehicle records – mileage logs, maintenance costs, and other vehicle expenses if you use your car for business; (4) Home office documentation – if you claim this deduction, records showing the square footage used exclusively for business; (5) Asset purchases – documentation for business equipment, furniture, or other depreciable assets; (6) Tax payments – records of estimated tax payments, including confirmation numbers or canceled checks; and (7) Previous tax returns – keep at least three years of past returns (the IRS recommends seven years). Digital record-keeping systems or accounting software can simplify this process and make tax preparation much easier.