Everyone who works in the US pays taxes on their income, including Social Security and Medicare taxes. However, how much you pay for these taxes and how you calculate them differs depending on whether you are self-employed or for someone else. As described below, learn how self-employed individuals calculate their Social Security and Medicare taxes on Schedule SE as part of preparing their federal income tax return.
- 1 What is self-employment tax?
- 2 The Self-Employment Tax Rate
- 3 Tax Calculation for Schedule SE
- 4 Schedule SE on Form 1040
- 5 Where to get help
What is self-employment tax?
If you are self-employed, you are self-employed, which means you do not work for an employer. You must pay Social Security and Medicare taxes as a self-employment (SECA) tax.
Self-employment tax is calculated using Schedule SE, a portion of your personal income tax return (Form 1040/1040-SR). Self-employment tax is based on your business income. The amount you must pay for self-employment tax depends on your business profit or loss for the tax year.
Schedule SE has been amended for tax year 2020, with the removal of the short form option and the addition of a new Part III to calculate an optional deferral of part of the self-employment tax for 2020. postponement is discussed below.
The Self-Employment Tax Rate
The self-employment tax rate is 15.3%, which includes 12.4% for Social Security and 2.9% for Medicare. Employees and their employers share these same costs, called FICA taxes.
While employees pay only half of the tax (the other half is paid by the employer), self-employed business owners pay the full amount, but can deduct half of the self-employment tax as a business expense. This deduction only affects your self-employment tax payment; it does not affect your net earnings from self-employment for benefit calculation purposes.
Social Security Limit and Additional Medicare Tax
Self-employment tax calculations include two exceptions:
- Social Security taxes are capped each year at a specific amount for self-employed business owners (as well as employees, but not employers). If your income is above the cap, you do not have to continue paying Social Security’s portion of the tax that year. The Social Security maximum for 2021 is $142,800.
- medicare taxes are not limited each year. An additional 0.9% Medicare tax must be included in the self-employment calculation on income over $200,000 each year.
Who must pay self-employment tax?
You must pay self-employment tax and file Schedule SE if your net earnings from self-employment were $400 or more for the year. Self-employed business owners who are required to pay self-employment tax include:
- Sole proprietors and owners of single-member limited liability companies (LLCs) who file business taxes on Schedule C along with their tax returns
- Partners in partnerships and owners of multi-member LLCs who file a partnership return and file Schedule K-1 for their share of partnership income on their tax returns.
Tax Calculation for Schedule SE
To calculate self-employment tax, you must first determine your net income from your business by completing Schedule C or Schedule K-1 for the tax year.
Part I Calculation of self-employment tax
For simplicity, let’s assume you have self-employment income from a business and no employment income.
- line 2: Net gain or (loss) from Schedule C or Schedule K-1. Enter your total self-employment income for the year.
- Line 3: Multiply Line 2 by 92.35%. If this number is less than $400, you do not owe self-employment tax and do not need to file the form.
- line 6: Assume you have no church employee income or one of the optional methods, so this number is your self-employment income subject to self-employment tax, which is the same as Line 3.
- line 7: The maximum amount of combined wages and self-employment earnings subject to Social Security tax. This number ($137,700 for 2020) is filled in for you.
- line 9: Check if you are subject to the Social Security maximum. If the number on line 6 is greater than $137,700, then $137,700 is the amount subject to self-employment tax.
- line 10: Multiply the lesser of Line 6 or Line 9 and multiply by 12.4% (0.0124) to obtain the Social Security portion.
- Line 11: Multiply line 6 by 2.9% (0.029) to get the Medicare portion.
- line 12: Add lines 10 and 11 to get your total self-employment tax.
- line 13: Multiply line 12 by 50% to get your half self-employment tax deduction.
Part III Deferral of Payments of Taxes on Self-Employment.
This section calculates the deferral of self-employed workers for the year 2020.
The 2020 CARES Act for coronavirus relief includes a Social Security tax deferral for employees and self-employed individuals. You may defer payment of 50% of the Social Security portion of your self-employment taxes, for the period beginning March 27, 2020, through December 31, 2020. You may use any reasonable method to allocate the income from your business during the months between April and December.
Then you must repay the deferred amount in two payments to the IRS:
- 50% as of December 31, 2021
- 50% as of December 31, 2022
The maximum deferred amounts are used to determine your equal refund amounts, not the amount you actually deferred (if any).
A simple calculation example
- Total net income from self-employment: $124,000. This amount is less than the Social Security maximum, so the entire amount is subject to tax. It’s also below the threshold for the additional Medicare tax, so you don’t need to pay any additional tax.
- Calculate the amount subject to self-employment tax: $124,000 x 92.35% (0.9235) = $114,514.
- Calculate self-employment tax: $114,514 x 15.3% (0.153) = $17,520.00
- Calculate the deduction: $17,520 x 50% (0.50) = $8,760.00
Schedule SE on Form 1040
You’ll enter Schedule SE calculations on IRS Form 1040/1040-SR in two places.
Enter the amount from Line 12 on Schedule 2 (Form 1040), Line 4 to include the amount of self-employment tax you owe.
Enter the amount on Line 13 of Schedule 1 (Form 1040), Line 1 to claim the half self-employment tax deduction.
Enter the amount from Line 26 in Part III to Line 12e of Schedule 3 (Form 1040). This is the amount of self-employment tax payments you can choose to defer. You can defer any amount up to the maximum allowed or not defer at all.
Where to get help
For more details on how to complete Schedule SE, see the IRS Instructions for this form. For 2020 taxes and deferral calculation, make sure you have the 2020 version.
Schedule SE is complicated, so it’s a good idea to get help from a tax professional to make sure it’s completed completely and correctly. If you are using business tax preparation software for a business, the program will calculate self-employment tax.