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Topic 554 – Self-Employment Tax
You’re self-employed for this purpose if you’re a sole proprietor (including an independent contractor), a partner in a partnership (including a member of a multi-member limited liability company (LLC) that has elected to be treated as a partnership for federal tax purposes), or are otherwise in business for yourself. The term sole proprietor also includes the member of a single member LLC that’s disregarded for federal income tax purposes and a member of a qualified joint venture. You usually must pay self-employment tax if you had net earnings from self-employment of $400 or more. Generally, the amount subject to self-employment tax is 92.35% of your net earnings from self-employment. You calculate net earnings by subtracting ordinary and necessary trade or business expenses from the gross income you derived from your trade or business. You can be liable for paying self-employment tax even if you currently receive social security benefits. The law sets a maximum amount of net earnings subject to the social security tax. This amount changes annually. All of your net earnings are subject to the Medicare tax.
If you had a loss or small amount of income from your self-employment, it may be to your benefit to use one of the two optional methods to compute your net earnings from self-employment. Refer to the Form 1040, Schedule SE Instructions to see if you qualify to use an optional method. An optional method may give you credit toward your social security coverage, or increase your earned income credit or the child and dependent care credit.
An employee of a church or qualified church-controlled organization who elected exemption from social security and Medicare taxes must pay self-employment tax if the church or qualified church-controlled organization paid more than $108.28 to the employee, unless he or she is personally exempt from self-employment tax. If you’re required to pay self-employment tax, you must file Form 1040 (PDF), U.S. Individual Income Tax Return, and attach Form 1040, Schedule SE (PDF), Self-Employment Tax. For more information on church related income and self-employment taxes, refer to Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers.
Self-Employment Tax Rate
The law sets the self-employment tax rate as a percentage of your net earnings from self-employment. This rate consists of 12.4% for social security and 2.9% for Medicare taxes.
Additional Medicare Tax
Additional Medicare Tax applies to self-employment income above a threshold. The threshold amounts are $250,000 for a married individual filing a joint return, $125,000 for a married individual filing a separate return, and $200,000 for all others. For additional information, see Questions and Answers for the Additional Medicare Tax.
Reporting Self-Employment Tax
Compute self-employment tax on Form 1040, Schedule SE (PDF). When figuring your adjusted gross income on Form 1040, you can deduct one-half of the self-employment tax. You calculate this deduction on Schedule SE. The Social Security Administration uses the information from Schedule SE to compute your benefits under the social security program.
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