If you’re working as an independent contractor, which includes working for companies such as Uber and Lyft, then chances are you will be paying self employment tax. Self employment tax is calculated on the net income from your business. If you’re thinking to yourself that you don’t have a business, well, think again. For tax purposes, working as an independent contractor means you are running your own business. Said differently, this means you are self-employed for tax purposes.

Self employment tax is another way of describing payroll taxes. Payroll taxes include Social Security and Medicare taxes. Most people never have to deal with self employment tax because they are only working as employees for other companies, and not for themselves. As an employee, your payroll taxes are automatically withheld from your paycheck and there is nothing further that you need to do. On the employer’s side, they are also paying these same payroll taxes. Together with your withholdings, they would remit this full amount to the government.

Self employment tax is the combination of an employee’s and employer’s share of payroll taxes. No one is withholding payroll taxes for you as you are self employed. Thus, you would owe the combination of the two calculated based on your business income. You may be required to pay quarterly estimates on the amount of tax you expect to owe.

Typically your income will be reported on a Form 1099 as opposed to a W-2 that you would get from an employer. You may be entitled to certain deductions to reduce your self employment income. Your payments would go to your social security fund, just as it would if you were an employee of a company. You also get to deduct half of the self employment tax owed (this is done to try and equalize the self-employed with the employer/employee relationship).

Hopefully this gave you a basic understanding of self employment tax. If you think you’ll need help with your taxes, be sure to contact me.