The $400 rule is just for self-employment taxes. Everyone still pays regular income tax.
Here’s how it works: employees pay part of their Social Security and Medicare taxes through their paycheck, and their employer pays the other half. But when you’re self-employed, you’re responsible for both parts. That’s why it feels like more.
If your self-employment income is less than $400, you don’t owe self-employment tax. But you still need to file taxes if you have other income.
@Nori
Good breakdown! One thing to add: even if you earn $400 or less, that amount gets included with any other income you made for the year.
It’s $400 a year.
If all your self-employment earnings add up to less than $400, you won’t have to pay self-employment taxes. These taxes cover Social Security and Medicare, and they’re what employers would normally deduct from a paycheck. Since you’re your own boss, you handle it yourself.
Basically, you add up what you earn and subtract your expenses to find your profit. Then you pay about 15% of that profit for Social Security and Medicare. For example, if you made $10,000 last year driving for a delivery app and drove 10,000 miles doing it, the IRS lets you deduct 62.5 cents per mile as an expense. That’s $6,250 in expenses, so your taxable income would be $3,750. From that, you’d owe around $550 in self-employment tax.
To clarify, the $400 is the threshold for needing to file self-employment taxes. If your only income is $100 from self-employment, you don’t have to file. But if you made $90,000 from a regular job and $100 self-employment, you’d need to file and include everything.
The IRS site has all the instructions you need. If you read through them, you’ll get a better understanding of how everything works.
$400 is the profit after expenses. If your income minus expenses is under $400, you don’t owe self-employment taxes. But this income might still count toward other taxes if you have additional earnings.
What do you mean by self-employment tax threshold?
Nova said:
What do you mean by self-employment tax threshold?
It’s the point at which you start owing Social Security and Medicare taxes on your income. For employees, their job handles it for them. For self-employed people, you’re responsible for all of it.
Nova said:
What do you mean by self-employment tax threshold?
So if I make $401 in profit from side gigs, I owe taxes? Even if I don’t make enough to owe regular income taxes?
Nova said:
What do you mean by self-employment tax threshold?
So if I make $401 in profit from side gigs, I owe taxes? Even if I don’t make enough to owe regular income taxes?
Yup. If your self-employment income is over $400, you owe the self-employment tax. But you might not owe income tax if your total income is below the filing threshold.