Who Pays Self-Employment Tax?
Sole proprietors, partners, LLC members, provided no election was made to treat the LLC as a C or S corporation, dealers in commodities and options, and farmers may be subject to to self employment tax.
A C corporation or S corporation owner/shareholder is an employee of the corporation and is subject to the same employment tax rules as any other employee.
A sole proprietor is not considered an employee of his own business, and therefore, is not subject to withholding taxes on the income from his business the way any employee is on his gross wages.
Since no taxes are withheld from the income of a sole proprietor's business, the sole proprietor pays quarterly estimated taxes to cover:
- Federal income tax liability on business net income and
- Self-employment tax on net earnings from self-employment (this is Social Security and Medicare taxes. While employee's of a company pay one half of these taxes and the employer pays one half, self-employed persons pay both halves).
Like a sole proprietor, a general partner in a partnership is not considered an employee of his own business either. Taxes are not withheld on partnership income distributed to a general partner.
Consequently, like a sole proprietor, each partner must pay his own taxes, including income taxes and self-employment taxes on net earnings from self-employment.
A partnership may include general partners and investors called limited partners. Unlike a general partner, who has unlimited liability for partnership debts, a limited partner is generally only liable up to the amount of his investment.
- A general partner pays self-employment tax on earnings from self-employment.
- A limited partner does not pay self-employment tax on his share of partnership income. However, if a limited partner receives guaranteed payments for services performed, such payments are subject to self-employment tax.
Retirement payments to partners are not subject to self-employment tax, provided:
- The payments are made under a qualified written plan providing for periodic payments
- The payments are not for services performed for the partnership
- The partner's share of partnership capital has been paid to him/her in full by the end of the partnership tax year.
Limited Liability Company (LLC) Members
LLC members owe self-employment tax when they-
- Provide services for their business,
- Participate in the management, and
- Are not passive investors.
Multiple-member LLC members, for tax purposes, are automatically treated as partners in a partnership unless an election was made to tax the entity as a corporation.
A member of a single-member LLC, for tax purposes, is automatically treated as a sole proprietorship unless an election was made to tax the entity as a corporation.
Dealers in Commodities and Options
Dealers in commodities and options are subject to self-employment tax.
A farmers operating as a sole proprietorship (Schedule F) is subject to self-employment tax. Cash or payments in kind under the Payment-in-Kind program are considered earned income and are subject to self-employment tax.
Statutory Employees and Self-Employment tax
Statutory employees are not subject to self-employment tax. Statutory employees include full-time life insurance salespersons, commission drivers distributing certain foods and beverages, pieceworkers, and full-time traveling or city salespersons.
The employer of a statutory employee must withhold FICA taxes from the employee's income.
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- Return to the Business Taxes Table of Contents to find related links