As a 1099 contractor or self-employed individual, you’re responsible for paying both the employer and employee portions of Social Security and Medicare taxes, commonly referred to as self-employment taxes. The current rates (as of my knowledge cutoff in 2022) are:
- Social Security Tax: 12.4% (up to the annual maximum income subject to Social Security tax)
- Medicare Tax: 2.9% (with an additional 0.9% for income over a certain threshold)
Here’s a breakdown:
- Social Security Tax:
- 12.4% on the first $142,800 (2021 and 2022) of net earnings from self-employment.
- Medicare Tax:
- 2.9% on all net earnings.
- Additional Medicare Tax:
- An additional 0.9% on net earnings over $200,000 for individuals ($250,000 for married couples filing jointly).
Total Combined Rate:
- For earnings over the applicable threshold, the total combined Medicare tax is 3.8% (2.9% regular Medicare tax + 0.9% additional Medicare tax).
Recommended Practice:
- Many self-employed individuals set aside around 25-30% of their net earnings for federal taxes. This percentage can vary based on factors like state taxes, deductions, and credits.
Quarterly Estimated Tax Payments:
- The IRS typically recommends making quarterly estimated tax payments to avoid underpayment penalties. These payments cover income taxes as well as self-employment taxes.
Note: Tax rates and thresholds can change, so it’s essential to check for the most up-to-date information from the IRS or consult with a tax professional to ensure accurate planning and compliance with tax obligations.
