Business Taxes

Quick Links

Hot Topics

Paychex Payroll Services: Sign up Today!

Need Some Deductions for 2011?

Don't overlook these!

10 Oddball Tax Deductions

11 Most Overlooked Tax Deductions

Updated for 2011

Self-Employment Tax

<< Previous

What is Net Earnings from Self-Employment?

Self-employment tax is based on "Net earnings from self-employment" which is figured on Schedule SE, Self-Employment Tax. If net earnings from self-employment is less than $400, you're not liable for self-employment tax and Schedule SE does not have to be filed.

The terms: net earnings from self-employment (computed on Schedule SE) and net profit (computed on Schedule C, or Schedule F for farming, or Schedule K-1 for partners) are two separate numbers.

Schedule C net profit must be computed before net earnings from self-employment can be computed. Schedule C net profit is carried to Schedule SE where it converted to net earnings from self-employment by multiplying the Schedule C net profit amount by .9235 (this percentage is preprinted on Schedule SE, Line 4 of Section A or Line 4a of Section B). 

EXAMPLE:

Note that the .9235 adjustment is the equivalent of a 7.65% reduction to net earnings reported on Schedule C (100% minus 92.35% = 7.65%).

UPDATE FOR TAX YEAR 2011:

For 2011, only the employee's share of social security tax was reduced 2%, to 4.2% (.042). The employer's share remains the same (6.2%). As of this writing, this reduction was extended for two months in 2012. Because of the 2% reduction in the employee's share of the social security tax, if self-employment tax is $14,204,40 or less, the deduction you may claim on Form 1040, line 27 is 57.51% of the self-employment tax. If the self-employment tax is more than $14,404,40, the deduction is 50% of the tax plus $1,060.

See the example of how to compute self-employment tax and your self-employment tax deduction under the new rate reduction for 2011.

Spouses: If you're married and you and your spouse each own your own unincorporated business, you each file your own Schedule SE (so that you both get credit for social security purposes).

On the other hand, if you and your spouse operate one unincorporated business, then you each file your own Schedule SE based on the percentage of ownership.

For example, if Schedule C net profit $50,000 and you each own 50% of the business, you each enter $25,000 on your own Schedule SE to figure your own self-employment tax.

Computing Net Earnings From Self-Employment

Steps to computing net earnings from self-employment:

  1. Carry net profit from Schedule C to Schedule SE, Section B, line 2.
  2. If line 1 is zero, enter the amount shown on line 2 on line 3
    • Line 1: If you have farm income (Schedule F) or income from a partnership (Schedule K-1), enter the total of these amounts on line 1. Then add lines 1 and 2 and enter the total on line 3.
  3. Multiply line 3 (Schedule C net profit) by .9235 (this percentage is preprinted on line 4a).
  4. The result in step 3 is your net earnings from self-employment.

When to Pay Self-Employment Tax

When you make your quarterly estimated tax payments, you include both your estimated federal income tax liability AND your estimated self-employment tax liability.

For tax year 2012, quarterly installments are due:

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

More Than One Business

Only one Schedule SE is required to be filed, regardless of the number of unincorporated businesses from which you had net earnings from self-employment.

For example, if you had three businesses, two with net earnings of $20,000 and one with a net loss of $5,000, you would file:

The net profit of $15,000 ($20,000 minus $5,000) would be entered on Schedule SE. The $15,000 would then be converted to net earnings from self-employment (.9235 x $15,000 = $13,853).

Net Operating Loss Deduction

Do not use a loss carried over from a previous year to reduce business income for self-employment tax purposes.

Personal Exemption and Self-Employment Tax

Do not use the personal exemption to reduce self-employment income.

Next:

Self-Employment Tax: Items Not Included in Self-Employment Income

Next >>