The Self-Employment Tax for the Newly Self-Employed

The Self-Employment tax isn’t actually a new tax you have to pay once you start your own business, it’s a continuation of the Social Security and Medicare taxes that you paid as an employee, but with a variation.

Employees have their social security and medicare taxes withheld from their paychecks as the FICA withholdings, (Federal Insurance Contributions Act). You, as a self-employed person, have to pay these taxes yourself at tax time. (Also note that tax time comes up four times a year through estimated tax payments for the self-employed.)

It is crucial for you to remember that the self-employment tax is altogether separate from your federal income tax.

Who must pay?
Generally, you are required to pay SE tax and file Schedule SE (Form 1040) if either of the following applies.
* If your net earnings from self-employment were $400 or more.
* If you work for a church or a qualified church-controlled organization (other than as a minister or member of a religious order) that elected an exemption from social security and Medicare taxes, you are subject to SE tax if you receive $108.28 or more in wages from the church or organization.

How do I do this?
You determine your self-employment tax at the same time as you determine your income tax. Your self-employment taxes are computed on Schedule SE which is then brought on to your Form 1040. Any amount you owe for self-employment tax is added to your personal tax liability for the current year and is paid to the IRS.

Also remember that the self-employment tax is to be included on your estimated income tax filings four times per year. If you anticipate
earning a profit for a year, you should pay both your estimated income taxes, and your estimated self-employment tax combined.

Self-employment tax rate.
The self-employment tax rate is 15.3%. The rate is made up of two parts: 12.4% for social security, and 2.9% for Medicare.

Maximum earnings subject to the self-employment tax.
Only the first $106,800 of your combined wages, tips, and net earnings is subject to any combination of the 12.4% social security portion of the self employment tax.

All your combined wages, tips, and net earnings are subject to any combination of the 2.9% Medicare part of self employment tax.

If you are also an employee.
If you are an employee, and self-employed in your own business venture, you are still required to pay a self-employment tax. The social security and medicare taxes on your employee earnings are taken care of just like always with the FICA withholding on your paycheck. However, you must pay these taxes on that portion of your net income derived from your own business.

Self-employment tax deduction.
You can deduct one-half of your self employment tax in calculating your adjusted gross income.  This deduction only bears upon your income tax.  It does not affect either your net earnings from self-employment or your self employment tax. 

Self-employed workers can deduct 100% of the costs of the health insurance premiums from their income taxes. However, the self-employed cannot deduct any of the costs of health insurance when calculating their self-employment tax liability.

More Information.

Of course the IRS has more information on this if you care to check it out. The Schedule SE can be found here http://www.irs.gov/pub/irs-pdf/f1040sse.pdf Instructions are found here http://www.irs.gov/pub/irs-pdf/i1040sse.pdf

Please Note:
I am not an attorney, nor am I a CPA. I simply need to know things, so I do some research, and then share what I’ve learned so that others may also benefit. My aim is to provide an overview, or a place to start your own investigations. Please be aware that tax laws can and do change from year to year. For actual bona fide tax advice please seek out a tax attorney.