Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners.
You figure SE tax yourself using Schedule SE (Form 1040). Social security and Medicare taxes of most wage earners are figured by their employers. Also you can deduct half of your SE tax in figuring your adjusted gross income. Wage earners cannot deduct social security and Medicare taxes.
Are You Self-Employed?
You are self-employed if any of the following apply to you:
- You carry on a trade or business as a sole proprietor or an independent contractor.
- You are a member of a partnership that carries on a trade or business.
- You are otherwise in business for yourself.
Who Must Pay Self-Employment Tax?
You must pay SE tax and file Schedule SE (Form 1040) if either of the following applies:
- Your net earnings from self-employment were $400 or more.
- You had church employee income of $108.28 or more.
Your net earnings from self-employment are based on your earnings subject to SE tax. Most earnings from self-employment are subject to SE tax. Some earnings from employment (certain earnings that are not subject to social security and Medicare taxes) are subject to SE tax.
If you have earnings subject to SE tax, use Schedule SE to figure your net earnings form self-employment. Before you figure your net earnings, you generally need to figure your total earnings subject to SE tax.
What is the Self-Employment Tax Rate?
The self-employment tax rate is currently 15.3 percent. The rate consists of two parts: 12.4 percent for social security (old-age, survivors, and disability insurance) and 2.9 percent for Medicare (hospital insurance). Only the first $87,000 of your combined wages, tips, and net earnings is subject to any combination of the 12.4 percent social security part of SE tax, social security tax, or railroad retirement (tier 1) tax.
All your combined wages, tips, and net earnings in 2003 are subject to any combination of the 2.9 percent Medicare part of SE tax, social security tax, or railroad retirement (tier 1) tax.
Self-Employment Tax Deduction
You can deduct half of your SE tax in figuring your adjusted gross income. This deduction only affects your income tax. It does not affect either your net earnings from self-employment or your SE tax.
How to Pay Self-Employment Tax
To pay SE tax, you must have a social security number (SSN) or an individual taxpayer identification number (ITIN).
- Obtaining a Social Security Number (SSN): If you never had an SSN, apply for one using Form SS-5, Application for a Social Security Card. You can get this form at any Social Security office or by calling 1-800-772-1213.
- Obtaining an Individual Taxpayer Identification Number (ITIN): The IRS will issue you an ITIN if you are a nonresident or resident alien and you do not have and are not eligible to get an SSN. To apply for an ITIN , file Form W-7, Application for IRS Individual Taxpayer Identification Number.
Social Security Administration (SSA) Time Limit for Posting Self-Employment Income
Generally, the SSA will give you credit only for self-employment income reported on a tax return filed within 3 years, 3 months, and 15 days after the tax year you earned the income. If you file your tax return or report a change in your self-employment income after this time limit, the SSA may change its records, but only to remove or reduce the amount. The SSA will not change its records to increase your self-employment income.
Next Steps: Hiring a Lawyer
You are a busy, self-employed small business owner. Payroll taxes can be complicated, stressful, and time-consuming. You want to make sure you are complying with the law or you could face severe penalties. Contact a business and commercial law attorney today.