Schedule SE - Self-Employment Tax

             Self-employed individuals are subject to self-employment tax on their net earnings from self-employment.  Earnings from self-employment comes from many sources, including Schedule C for sole proprietorships, and Schedule K-1 for partnerships and LLC members.  The self-employment tax is used to provide funds for Social Security and Medicare benefits.  Schedule SE is used to compute self-employment tax.  The schedule is mandatory if the taxpayer has $400 or more in self-employment net earnings.  If the taxpayer has more than one source of self-employment income, they are combined together and reported on a single Schedule SE.

             Net self-employment earnings are first multiplied by 0.9235 before computing the amount of self-employment tax.  After self-employment tax is carried to the taxpayer’s income tax return, a deduction is also taken for half of the self-employment tax.  This deduction appears on Line 27 on Form 1040.

             The self-employment tax rate is 15.3%, which is the sum of 12.4% for Social Security and 2.9% for Medicare.  Net earnings from self-employment, after being multiplied by 0.9235, are multiplied by the 15.3% rate, if taxable net earnings are not more than $97,500.  The reason for the 15.3% rate is that it comes close to matching the employee and employer portions of Social Security and Medicare taxes for a W-2 employee.

             In some cases, retired persons decide to become self-employed and generate earnings from self-employment.  These taxpayers would be liable for self-employment tax on their self-employment income even though they have retired and are receiving Social Security benefits.

             There are also taxpayers with both self-employment income and wage or W-2 income which is subject to Social Security and Medicare taxes, also known as FICA taxes.  The taxpayer’s self-employment tax liability can be affected by the amount of those FICA earnings.  In the case of a taxpayer whose FICA wages or tips equal or exceed $97,500, that taxpayer’s net earnings from self-employment would only be subjected to the 2.9% rate.

             For a statutory employee, like a full-time insurance salesperson, their wages would be subject to withholding for Social Security and Medicare taxes.  Therefore, the statutory employees would not be liable for self-employment tax. 

             The Internal Revenue Service has specific rules relating to self-employment tax for some occupations or businesses.  For example, a babysitter working out of their own home and controlling the performance of their own duties would be considered self-employed.  However, if the babysitter carries out their duties according to someone else’s, such as the parents’, instructions, he or she is the employee of the parents, and not self-employed.  Another specific rule relates to directors.  If you are not an employee of the company, but are paid fees for attending meetings, those fees are considered self-employment income, and would be subject to self-employment tax.

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