What is Self-Employment Tax?
Self-employment tax (SE Tax) is the social security and medicare taxes levied on self-employed individuals (individuals who work for themselves). This is a must-pay tax in order for you to be eligible for benefits upon retirement.
SE Tax is a "pay-as-you-go tax" or tax that must be paid as you earn and receive income during the year. If you expect to owe federal income tax, including SE tax of $1,000 or more, you are required to make estimated tax payments when you file your return.
Compute your SE tax using Schedule SE which is your Form 1040. You can also calculate it using a self-employment tax calculator to estimate your SE taxes due.
Self-Employment Tax Rate
The self-employment tax rate is 15.3% which is divided into two parts:
Maximum Earnings Applied to SE Tax
While all earnings and net profit in 2009 are subject to the 2.9% health/medical care part of SE tax, only the first $106,800 of your total wages (including tips) and net profit in 2009 is subject to the 12.4% social security part of SE tax.
SE Tax as an Income Tax Deduction
Half of your self-employment tax is a tax deduction from your end-of-year taxable income. This deduction does not affect your self-employment net earnings or your SE tax.
While a self-employed individual can deduct 50% of his SE Tax to figure his adjusted gross income, wage earners are not entitled to social security and medicare income tax deductions.
Payment of Self-Employment Tax
It is required that you hold a social security number (SSN) or a taxpayer's ID number (ITIN) to pay SE tax.
You can obtain a social security number by applying for one using the SS-5 Form. This form is available at any Social Security office or you can call (800) 772-1213. You can also download the form the Social Security Online Website.
To get an Individual Taxpayer Identification Number (ITIN), you have to file Form W-7. Nonresidents or residents who do not have or are not entitled to get an SSN are issued an ITIN by the IRS.
Methods of Payment
You can pay your self-employment tax in two ways:
If you are self-employed and do not have withholding tax you can make estimated tax payments. (See Estimated Tax Payments)
Who Should Pay Self-Employment Tax?
You are required to file Form 1040 and pay SE tax if any of the following applies:
You can use Schedule SE to estimate your net earnings from self-employment.
Self-Employment Tax Qualifications
You are self employed if you belong to any of the following categories. These are:
A trade or business is defined as any activity or enterprise entered into for profit. There are determinant factors to identify an activity as a trade or business such as the frequency of transactions, the intent to create profit, interests to further the business, etc.
An independent contractor includes doctors, veterinarians, accountants, lawyers, public stenographers, auctioneers and the like who by their profession offer their services to the general public. The general rule is that if the individual's services is not controlled by an employer, he/she is an independent contractor.
If you own an unincorporated business, you are a sole proprietor. If you solely own a domestic limited liability company, you are a sole proprietor only if you have not elected to treat the LLC as a corporation.
Earned Income Tax Credit
By filing Form 1040 Schedule C, you may be eligible for an earned income tax credit. (See Earned Income Tax Credit)
Tax Fiscal Year Filer
If you are a fiscal year taxpayer (if you use a tax year other than the calendar year), you must use the tax rate and wage limit at the start of your tax year. You must continue using the same rate and limit regardless of changes in tax rate limit or total earnings limit during your tax year.
Self-employment tax (SE Tax) is the social security and medicare taxes levied on self-employed individuals (individuals who work for themselves). This is a must-pay tax in order for you to be eligible for benefits upon retirement.
SE Tax is a "pay-as-you-go tax" or tax that must be paid as you earn and receive income during the year. If you expect to owe federal income tax, including SE tax of $1,000 or more, you are required to make estimated tax payments when you file your return.
Compute your SE tax using Schedule SE which is your Form 1040. You can also calculate it using a self-employment tax calculator to estimate your SE taxes due.
Self-Employment Tax Rate
The self-employment tax rate is 15.3% which is divided into two parts:
- 12.4% for social security (seniors, survivors, and disability insurance)
- 2.9% for health/medical care or hospital insurance.
Maximum Earnings Applied to SE Tax
While all earnings and net profit in 2009 are subject to the 2.9% health/medical care part of SE tax, only the first $106,800 of your total wages (including tips) and net profit in 2009 is subject to the 12.4% social security part of SE tax.
SE Tax as an Income Tax Deduction
Half of your self-employment tax is a tax deduction from your end-of-year taxable income. This deduction does not affect your self-employment net earnings or your SE tax.
While a self-employed individual can deduct 50% of his SE Tax to figure his adjusted gross income, wage earners are not entitled to social security and medicare income tax deductions.
Payment of Self-Employment Tax
It is required that you hold a social security number (SSN) or a taxpayer's ID number (ITIN) to pay SE tax.
You can obtain a social security number by applying for one using the SS-5 Form. This form is available at any Social Security office or you can call (800) 772-1213. You can also download the form the Social Security Online Website.
To get an Individual Taxpayer Identification Number (ITIN), you have to file Form W-7. Nonresidents or residents who do not have or are not entitled to get an SSN are issued an ITIN by the IRS.
Methods of Payment
You can pay your self-employment tax in two ways:
- withholding tax
- estimated tax
If you are self-employed and do not have withholding tax you can make estimated tax payments. (See Estimated Tax Payments)
Who Should Pay Self-Employment Tax?
You are required to file Form 1040 and pay SE tax if any of the following applies:
- Your self-employment net earnings less your church employee income is greater than or equal to $400.
- Your church employee income is greater than or equal to $108.28.
You can use Schedule SE to estimate your net earnings from self-employment.
NOTE: No matter how old you are or even if you are getting social security or medicare, you are still covered by the SE tax policies.
Self-Employment Tax Qualifications
You are self employed if you belong to any of the following categories. These are:
- You own a trade or business or if you are an independent contractor.
- Partnership that carries on a business.
- You are in business yourself.
A trade or business is defined as any activity or enterprise entered into for profit. There are determinant factors to identify an activity as a trade or business such as the frequency of transactions, the intent to create profit, interests to further the business, etc.
An independent contractor includes doctors, veterinarians, accountants, lawyers, public stenographers, auctioneers and the like who by their profession offer their services to the general public. The general rule is that if the individual's services is not controlled by an employer, he/she is an independent contractor.
If you own an unincorporated business, you are a sole proprietor. If you solely own a domestic limited liability company, you are a sole proprietor only if you have not elected to treat the LLC as a corporation.
Earned Income Tax Credit
By filing Form 1040 Schedule C, you may be eligible for an earned income tax credit. (See Earned Income Tax Credit)
Tax Fiscal Year Filer
If you are a fiscal year taxpayer (if you use a tax year other than the calendar year), you must use the tax rate and wage limit at the start of your tax year. You must continue using the same rate and limit regardless of changes in tax rate limit or total earnings limit during your tax year.
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