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:

1. You carry on a trade or business as a sole proprietor or an independent contractor.
2. You are a member of a partnership that carries on a trade or business.
3. 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:

1. Your net earnings from self-employment were $400 or more.
2. 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 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance). Only the first $87,000 of your combined wages, tips, and net earnings in 2003 is subject to any combination of the 12.4% social security part of SE tax, social security tax, or railroad retirement (tier 1) tax.