Business Taxes

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Updated for 2011

Self-Employment Tax

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Self-Employment Tax and Business Interruption Insurance Proceeds

The IRS does not agree with the Tax Court over whether business interruption insurance proceeds must be reported as earnings subject to self-employment tax.

In a case involving a grocer, the Tax Court said the insurance payments for lost earnings were not subject to self-employment because the payments were not for actual services.

The IRS disagrees. They say, the income would have been earned had to operations not been interrupted.

Self-employment tax is social security and Medicare taxes paid by self-employed individuals (these taxes are referred to as FICA taxes for employees).

FICA stands for Federal Insurance Contributions Act.

Schedule SE is used to compute self-employment tax. This schedule is filed along with Schedule C and Form 1040.

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 extended for two months in 2012.

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

You're only liable for self-employment tax if net earnings from self-employment is $400 or more. If net earnings from self-employment is less than $400 you are not required to file Schedule SE.