Updated: Sep 5, 2019
Entrepreneurs, side hustlers, sole proprietors, some business owners and other people who work for themselves are often subject to the self-employment tax. When you work for an employer, that employer usually pays half of your employment tax and deducts the other half from your pay. When you work for yourself, you are required to pay the full amount.
WHO PAYS IT
If you are an independent contractor, sole-proprietor, partner, S-Corp shareholder or receive certain types of wages on Form 1099 - you are (probably) paying Self-Employment Tax.
You must pay self-employment tax and file Schedule SE (Form 1040) if either of the following applies.
Your net earnings from self-employment (excluding church employee income) were $400 or more.
You had church employee income of $108.28 or more.
Certain caregivers may or may not be subject to self employment tax depending on the facts and circumstances. The IRS has a helpful Q&A to determine whether a caregiver is subject to the tax.
The self-employment tax rules apply no matter how old you are and even if you are already receiving Social Security or Medicare.
Note, this tax is only imposed on income from a trade or business. A trade or business is an activity you conduct with regularity and with a profit motive. This means that, that random $150 you received for fixing your neighbor's kitchen sink might not be subject to the tax.
WHAT IS IT
Self-Employment Tax is a 15.3% tax comprised of Social Security and Medicare Tax. You figure self-employment tax (SE tax)using Schedule SE (Form 1040). In 2019, taxpayers who made less than $132,900 can calculate self-employment tax on the Short Schedule SE. This is a one page schedule that pretty much sums up your income subject to the self-employment tax and applies the applicable tax percentages.
The maximum amount of self-employment income subject to social security tax is $132,900. Taxpayers with income above this amount complete the Long Schedule SE. The calculation on this schedule has a few more line items to determine the amount of self-employed income subject to the tax.
HOW TO PAY IT
You pay this tax on your annual tax return - Form 1040. If your tax liability is greater than $1,000 - you should make quarterly payments to avoid a penalty.
A benefit of this tax is that you can deduct the employer-equivalent portion of your SE tax in figuring your adjusted gross income. Individuals who receive wages from an employer cannot deduct a portion of this tax. Note that this deduction only affects your income tax.
Under Section 2042 of the Small Business Jobs Act, a deduction, for income tax purposes, is allowed to self-employed individuals for the cost of health insurance. This deduction is taken into account in calculating net earnings from self-employment. See the Form 1040 and Schedule SE instructions for calculating and claiming the deduction.
The Self Employment tax is different from income tax. Income that is not subject to self employment tax might still be subject to income tax. Make sure to provide accurate details for all earned income to your tax preparer to ensure the income is reported and taxed properly. For more information, see IRS Self Employment Tax Social Security and Medicare Taxes.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisers before engaging in any transaction.