This article describes Schedule SE, with information on how to use it to calculate self-employment tax and report it on your personal tax return.
How Is Self-Employment Tax Determined?
The Self-Employment Contributions Act (SECA) tax is the tax due on your earnings as a self-employed business owner to fund Social Security and Medicare programs and calculate benefits. You report these earnings to the Internal Revenue Service (IRS) on Schedule SE. You must report your business income on Schedule SE if you have more than $400 of taxable business income for the year, even if you are already receiving Social Security or Medicare benefits. If you have more than one business, your self-employment tax amount is determined by adding the net income from all of your businesses on Schedule SE. A loss in one business can reduce the income from another. You can include income from your trade or business as self-employment income for Social Security/Medicare benefits, but you can’t include income from:
Real estate rentals, unless you are in business as a real estate dealer Stock dividends A limited partnership Loan interest, unless your business is lending money Capital gains from the sale of an asset like machinery or a vehicle.
Include deductions for operating expenses—like advertising, employee pay and benefits, insurance, and payments to professionals—from your Schedule C. You can also include deductions for home business expenses for the part of your home that’s used regularly and exclusively for business purposes, as well as for business driving expenses.
Current Self-Employment Tax Rates
The total self-employment tax rate is 15.3% of business net income—12.4% is for Social Security (old-age, survivors, and disability insurance) and 2.9% is for Medicare. The Social Security part is capped each year for employees. The maximum for 2021 is $137,700 for all Social Security tax on income from employment and income from business ownership. Medicare tax isn’t capped, and there is an additional 0.9% Medicare tax on your total income for the year.
How To Complete Schedule SE
Schedule SE is a complicated form, in part because it applies to different situations, including farm businesses and religious positions. This discussion looks at only the parts of the form that apply to general small-business owners. Line 2: Record the net profit or loss from your business. If you file Schedule C as a solo business owner, report the whole amount. If you are a partner or a member of a multiple-owner LLC, record the amount from your Schedule K-1 that shows your part of the income of the business. If the total amount of Line 1a and 2 is less than $434, you don’t need to complete Schedule SE unless you want to use the optional method mentioned above. Line 4a: Multiply the amount on Line 2 by 92.35% (0.9235). Line 7: This is the Social Security maximum for the year (filled in). Lines 8a, b, and c: These lines are for calculating any Social Security wages or salaries as an employee to determine if you exceed the Social Security maximum for the year. Lines 10 and 11: Here, you calculate the Social Security and Medicare portions of the self-employment tax. Line 12: This is the total of Lines 10 and 11 and the total self-employment tax to be transferred to Schedule 2 (Additional Taxes) of Form 1040.
Deduction From Self-Employment Tax
Because self-employed individuals must pay the full amount of self-employment tax, they can take a deduction to bring the tax amount down to what an employer would pay. The amount of this deduction is 50% of your total taxable self-employment income. Calculate the amount of this deduction by multiplying the amount on Line 12 of Schedule SE by 50%, adding it to Line 13, and transferring it to Schedule 1 of Form 1040. For the example above, you could record a deduction of $68,850 (the 2021 max deduction of $137,700 x 0.5).
Paying Self-Employment Tax
The amount of tax you owe for self-employment tax each year minus the deduction is included with all other sources of income, alongside tax credits and deductions, on your yearly personal tax return to get your yearly taxable income. This amount is compared to the tax payments you have made during the year to see how much you still owe on your total income. Because you are a business owner and not an employee, you don’t have withholding for business income taxes and self-employment taxes. The IRS expects everyone to pay taxes during the year, so you may need to make quarterly estimated tax payments during the year to avoid underpayment penalties.
Sole proprietors and independent contractorsMembers (owners) of limited liability companies LLCsPartners in partnerships
S corporation owners and shareholders of corporations do not have to file Schedule S because they aren’t considered to be self-employed. Deducting half of the total self-employment tax amount reduces your total taxable income on your return. This will reduce the equivalent employer part of Social Security and Medicare taxes for employees without affecting the amount of your Social Security and Medicare tax benefits.
