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Accounting Information > IRS Tax Forms > Schedule SE Self Employment Tax

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.

            If you are looking for a CPA or Accounting Firm to assist you with your income tax reporting, bookkeeping, financial planning, or general accounting needs, then you have come to the right place!  Use the CPA Search feature on this website to find a qualified professional in your area to meet your needs.

           

 
 
 
 
 
 
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