If you’re a gig worker or freelancer, you’re technically considered self-employed – even if all the work you do is for the same company. This means that you are an employee, but at the same time you act as an “employer”. And that means you’ll probably have to pay self-employment tax.
The IRS just announced 2024 updates to tax brackets and other data, which are adjusted annually for inflation. One of the most important updates that gig workers and freelancers need to be aware of is the maximum earnings subject to Social Security tax, which could have big implications for self-employment tax.
How self-employment tax works: quick version
Most workers in the United States are required to pay taxes to help fund Social Security and Medicare. The Social Security tax rate is 6.2% of all earned income up to a certain limit, and the Medicare tax rate is 1.45% All income obtained without limits.
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If you work traditionally – which means you receive a W-2 at the end of the year – you pay Social Security and Medicare taxes at these rates, and your employer also contributes an equal amount to these programs. However, if you are self-employed, you are both the employer AND Employee.
Therefore, self-employed people are liable to pay these taxes to both the employer and the employee. This is collectively called the self-employment tax.
Big change to self-employment tax in 2024
In 2023, the self-employment tax structure is as follows:
- 15.3% of the first $160,200 of net self-employment income (Social Security and Medicare)
- 2.9% of any income over $160,200 (Medicare only)
However, the 15.3% threshold – which is officially called the National Insurance Contribution Base and Benefit Base – is adjusted upwards every year due to inflation. In 2024, the contribution and benefit basis, or the maximum amount of income tax to which Social Security tax can be applied, will increase by $8,400 to $168,600.
It’s also worth mentioning if you’re a gig worker or freelancer apart from W-2 employment, contribution and benefit basis apply to all of your earned income. For example, if you earn $100,000 through W-2 employment in 2023, a maximum of $160,200 of self-employment income is subject to the full 15.3% self-employment tax rate.
What this could mean for you
If you earn relatively well and have self-employment income, this could result in a large tax increase in 2024. In fact, the $8,400 increase in the premium and benefit basis translates into an additional $1,041.60 in self-employment tax for those earning more than $168. $600 net income from self-employment.
Unlike federal income tax, there are no deductions or credits to reduce your self-employment tax. You could potentially form an S corporation and pay yourself a salary from it to reduce your self-employment tax, or if you’re a high-earning freelancer or gig worker, you could discuss this option with a financial advisor or accountant.
Another effective strategy may be to make sure you record and report all your business expenses correctly (again, talk to your tax or finance professional), as self-employment tax is only charged on Internet self-employment income and business expenses lower this number.
The bottom line is that there are several ways to potentially reduce your self-employment tax, but even if that’s not possible, it’s important to know what to expect next year so you can plan for estimated tax payments and other tax strategies.
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