Self-Employment Tax

Self-employment Tax means: a provision for Social Security (old-age, survivor’s and disability insurance) and Medicare hospital insurance for self-employed individuals.Self-employment tax is similar to Social Security and Medicare taxes. It is an amount of tax paid by a taxpayer who is self-employed. The tax rate is a certain percent of self-employment profit. The self-employment tax is calculated on Federal Schedule SE, and reported on Form 1040. The self-employment tax rate is 15.3 percent of self-employment profit. The self-employment tax is calculated on Schedule SE-Self-Employment Tax. The self-employment tax is reported on Form 1040, U.S. Individual Income Tax Return.

Historical Rate

In 1994, the Social Security portion of the self-employment tax was 12.4% on net earnings from self- employment up to $60,600; the Medicare portion, 2.9% on all net earnings. The estimated self-employment tax must be paid quarterly with the estimated income tax. After 1993, all self-employment income was subject to the 2.9% rate for Medicare. Former IRC (check if this IRC provision is current here) § § 1401 and 1402.

Compulsory Payment of Self-Employment Tax

By Julian Block (2013), former IRS Special Agent and tax Editor of Mutual Funds Magazine.

If you had net earnings from self employment of $400 or more you are probably liable to the IRS for self employment tax. Net earnings are calculated by subtracting ordinary and necessary trade or business expenses from your total self employment income. You are self employed for this purpose if you are a sole proprietor, an independent contractor, a member of a partnership, or are otherwise in business for yourself. You can be liable for paying self employment tax to the IRS even if you are currently receiving Social Security benefits.

If you had a small profit or net loss from your business but want to pay into the Social Security system, you may be eligible to file Form 1040, Schedule SE and use one of the two optional methods to compute your net earnings from self employment. See IRS Publication 533, Self-Employment Tax, to see if you qualify to use an optional method. This method may also allow you to qualify for the Earned Income Tax Credit or the Child and Dependent Care Tax Credit.

Maximum Wages Subject to Social Security tax $106,800.00
Social Security tax rate (Employee) 4.20%
Maximum Social Security tax (Employee) $4,486.00
Social Security tax rate (Employer) 6.20%
Maximum Social Security tax (Employer) $6,621.00
Social Security tax rate (Self Employed) 1 10.40%
Maximum Social Security tax (Self Employed) 1 $11,107.00
Maximum Wages Subject to Medicare tax Unlimited
Medicare tax rate (Employee) 1.45%
Medicare tax rate (Employer) 1.45%
Medicare tax rate (Self Employed) 2.90%

Footnotes: 1 Self employed persons are entitled to deduct one-half of their self employment tax on Line 27 of Form 1040.

Self employment tax is computed on Schedule SE of Form 1040 and reported on line 56 of Form 1040. You are also entitled to an income adjustment in figuring adjusted gross income equal to one-half of your self employment tax for the year on line 27 of Form 1040.

If you are an employee of a church or qualified church-controlled organization that elected tax exemption from Social Security tax and Medicare tax, you must pay self employment tax if you are paid $108.28 or more in a tax year. If you are required to pay self employment tax, you must file Form 1040 and attach Schedule SE. For more information on church related income and self employment tax see IRS Publication 517.

Related tax information about self employment tax:

Is income from a sole proprietorship taxable?
Is income from a part time business taxable?
Is the income of an independent contractor taxable?
Employee or independent contractor?
Is income from my hobby taxable?
Are hobby losses tax deductible?
Clergy
Home Office Tax Deductions
Is partnership income taxable?
Income Related Questions and Answers

IRS publications about self employment tax:

For additional information about self employment tax refer to IRS Publication 533, Self-Employment Tax, and IRS Publication 334, Tax Guide for Small Business. Also see IRS Publication 17, Your Federal Income Tax.

Description and Definition of Self Employment Tax

Tax paid by self employed persons on the net income from their trade or business to finance Social Security and Medicare coverage. For 1999 the rate is 15.30% on the first $72,600 of earnings and 2.9% on all amounts over $72,600.