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Updated for 2011

Self-Employment Tax

What is Self-Employment Tax?

Self-employment tax consists of both social security tax and Medicare tax. Sole proprietors and partners in a partnership are considered self-employed and therefore, are subject to self-employment tax. Self-employment tax is figured on Schedule SE.

For employees, social security and Medicare taxes are referred to as FICA taxes.

FICA stands for Federal Insurance Contribution Act. It is a tax imposed on employees and employers and is used to fund the Social Security System. Your payments contribute to your coverage for retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare).

When You Must Pay Self-Employment Taxes

You figure self-employment taxes on Schedule SE annually and attach it to Form 1040 and Schedule C (or Schedule F for an unincorporated farming business).

If you make estimated tax installments, you pay estimated self-employment tax along with estimated federal income taxes on the installment dates.

For tax year 2012, quarterly installments are due:

  1. April 17
  2. June 15
  3. September 17
  4. January 17, 2013

Self-Employment Tax Rate

A self-employed person pays 100% of the tax, while an employee and his/her employer each pay one-half of the tax.

The self-employment tax rate is 15.3% and is comprised of:

A self-employed person pays the entire 15.3% while an employee and his/her employer each pay one-half the rate, or 7.65% each.

The tax is imposed on gross wages for employees and net earnings from self-employment of $400 or more for self-employed persons.

UPDATE: For 2011, the employee's share of social security tax was reduced 2%, to 4.2% (.042). As of this writing, this reduction was also extended for two months in 2012.

Figuring Your Self-employment Tax Deduction

Because of the 2% reduction in the social security tax for employees, a self-employed person must perform a special computation to figure the self-employment tax deduction, which is entered on the first page of Form 1040.

  • If self-employment tax is $14,204.40 or less, multiply the amount by 57.51% to figure your self-employment tax deduction, which is entered on page one of Form 1040.
  • If self-employment tax is more than $14,204.40, multiply the tax by 50% and add $1,067 to the result to get your deduction. 

Earnings Limitation for Social Security Tax

The amount of earnings subject to the social security portion of the self-employment tax is limited. However, there is no earnings limitation for Medicare taxes.

For 2011 the social security wage base is $106,800.

For example, if your 2008 net earnings from self-employment is $110,000, you would pay social security tax of 12.4% x $102,000 or $12,648.

Your Medicare tax would be 2.9% x $110,000 (there is no wage limit) or $3,190.

Income From a Job and Self-Employment

If you have income from a job plus net earnings from self-employment, you must combine your gross job (wage or salary) income and self-employment earnings to figure your maximum earnings subject to social security tax.

Example:

Computing self-employment tax and the self-employment tax deduction.

Note: The net profit reported on Schedule C is carried to Schedule SE where it is reduced by 7.65%. The reduction is accomplished by multiplying Schedule C net profit by 92.45% (.9235), which a preprinted on Form Schedule SE, Line 4a on Long Schedule SE. 

Next:

Self-Employment Tax: Who Pays Self-Employment Tax? Statutory Employees and Self-Employment tax

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