What is Self-Employment Tax?
Self-employment tax consists of both social security tax and Medicare tax. Sole proprietors and partners in a partnership are considered self-employed and therefore, are subject to self-employment tax. Self-employment tax is figured on Schedule SE.
Deductions for Retirement Plans
In figuring your self-employment tax do not reduce net earnings by your deductible contributions to your own SEP or Keogh plan (Form 1040, Line 28) or your self-employed health insurance deduction (Form 1040, Line 29).
You'll notice on Schedule SE, line 4a, there is a decimal of .9235 listed. You multiply the net profit amount on Schedule C by this decimal to determine net earnings from self-employment.
Net Operating Loss Deduction
Do not use a loss carried over from a previous year to reduce business income for self-employment tax purposes.
Do not use the personal exemption to reduce self-employment income.
When to File Schedule SE
You must file Schedule SE if net earning from self-employment is $400 or more. If you had a job and also received self-employment income, take into account your wages from your job when figuring maximum earnings subject to the social security portion of the the self-employment tax.
When You're Not Required to File Schedule SE
If net earning from self-employment, figured on Schedule SE, is less than $400, you're not liable for self-employment tax. You're not required to file Schedule SE.
More Than One Business
Only one Schedule SE is required to be filed, regardless of the number of unincorporated businesses from which you had net earnings from self-employment.
For example, if you had three businesses, two with net earnings of $20,000 and one with a net loss of $5,000, you would file:
- Three Schedule Cs
- One Schedule SE
When You Must Pay Self-Employment Taxes
You figure self-employment taxes on Schedule SE annually and attach it to Form 1040 and Schedule C (or Schedule F for an unincorporated farming business).
If you make estimated tax installments, you pay estimated self-employment tax along with estimated federal income taxes on the installment dates.
For tax year 2014, quarterly installments are due:
- April 15
- June 16
- September 15
- January 15, 2015
The last quarterly installment for 2013 is due January 15, 2014.
For 2013, the self-employment tax rate is once again 15.3%, which was the pre-2011 rate before the 2% reduction in the Social Security tax in 2011 and 2012. Self-employed persons pay both halves of the social security tax and Medicare tax.
Social Security Tax Wage Base
The 2013 social security wage base limit increases to $113,700 (up $3,600 from the 2012 taxable wage base of $110,100).
For Medicare tax purposes, there is no limit on the amount on earned income that may be taxed.
Figuring Your Self-employment Tax Deduction for 2013
For 2013, your self-employment tax deduction is 50% of the tax. You figure your self-employment tax on Schedule SE. The 50% deduction is entered on Line 27 of Form 1040.
Figuring Your Self-employment Tax Deduction for 2012
For tax years 2011 and 2012, figuring your self-employment tax deduction is not quite as straight forward as it is in 2013.
Since the Self-employment Tax for 2011 and 2012 reflects the 2% reduction in the social security rate, to claim the self-employment tax deduction on Form 1040, a self-employed person must perform a special computation to figure the amount of the deduction.
- If self-employment tax is $14,204.40 or less, multiply the amount by 57.51% to figure your self-employment tax deduction.
- If self-employment tax is more than $14,204.40, multiply the tax by 50% and add $1,067 to the result to get your deduction.
Income From a Job and Self-Employment
If you have income from a job plus net earnings from self-employment, you must combine your gross wages from your job and your net earnings from self-employment to figure your maximum earnings subject to social security tax.
Beginning 2013, Additional .9% (.009) Tax on Medicare
Beginning in 2013, high income earners will be hit with an extra .9% (.009) Medicare tax. The additional .9% kicks in when income thresholds reach the following:
- Salary and/or self-employment income above $200,000 for a single filer.
- Salary and/or self-employment income over $250,000 for couples filing a joint return.
- Salary and/or self-employment income above $125,000 for married individuals filing separate returns.
These thresholds will not be adjusted for inflation.
Self-employed people pay the additional .9% via their self-employment tax. Unfortunately, the additional .9 percent won't qualify for a deduction on Form 1040 (the above-the-line deduction for self-employment tax). The additional .9 percent Medicare tax must be taken into account for estimated tax purposes.
The regular Medicare tax rate for lower income taxpayers remains 2.9% (1.45% for the employer's share and 1.45% for the employee's share.
Self-employed persons pay the entire 2.9% via the self-employment tax computed on Schedule SE.
- Return to the Business Taxes Table of Contents to find related links