Who Pays Self-Employment Tax?

---

Sole proprietors, partners, LLC members (provided no election was made to treat the LLC as a C or S corporation), dealers in commodities and options, and farmers may be subject to self employment tax.

A C corporation or S corporation owner/shareholder who works for the business is an employee of the business and is subject to the same employment tax rules as any other W-2 employee.

Sole Proprietors

A sole proprietor is not considered an employee of his/her own business, and therefore, is not subject to withholding taxes on the income from his business. Self-employed persona generally pay quarterly estimated taxes to cover their:

• Federal income tax liability on business net income and
• Self-employment tax on net earnings from self-employment.

Partners

A partner in a partnership is not considered an employee of the business. Taxes are not withheld on partnership income. Each partner must pay his/her own income taxes and self-employment taxes on net earnings from self-employment.

Limited Partners

A partnership may include investors called limited partners. Unlike a general partner, who has unlimited liability for partnership debts, a limited partner is generally only liable up to the amount of his/her investment in the business.

• A general partner pays self-employment tax on earnings from self-employment.
• A limited partner does not pay self-employment tax on his share of partnership income. However, if a limited partner receives guaranteed payments for services performed, such payments are subject to self-employment tax.

Retirement payments to partners are not subject to self-employment tax, provided:

• The payments are made under a qualified written plan providing for periodic payments
• The payments are not for services performed for the partnership
• The partner's share of partnership capital has been paid in full by the end of the partnership tax year.

Limited Liability Company (LLC) Members

LLC members owe self-employment tax when they...

• Provide services for their business,
• Participate in the management, and
• Are not passive investors.

Multiple-Member LLC:

Multiple-member LLC members, for tax purposes, are automatically treated as partners in a partnership unless an election was made to tax the entity as a C or S corporation.

Single-Member LLC:

A member of a single-member LLC, for tax purposes, is automatically treated as a sole proprietorship unless an election was made to tax the entity as a C or S corporation.

Dealers in Commodities and Options

Dealers in commodities and options are subject to self-employment tax.

Farmers

A farmer operating as a sole proprietorship (Schedule F) is subject to self-employment tax. Cash or payments in kind under the Payment-in-Kind program are considered earned income and are subject to self-employment tax.

Statutory Employees and Self-Employment tax

Statutory employees are not subject to self-employment tax. Statutory employees include full-time life insurance salespersons, commission drivers distributing certain foods and beverages, pieceworkers, and full-time traveling or city salespersons.

The employer of a statutory employee must withhold FICA taxes from the employee's income.