Self-Employment Taxes
Self-employment tax (SE tax) applies to people who work for themselves. It is in addition to income tax and covers Social Security and Medicare tax. The Social Security Administration uses the information from your tax returns to figure your benefits, allowing you to be covered under the social security system.
You must pay SE tax and file IRS Form 1040 (Schedule SE), Self-Employment Tax if either of the following applies:
- Your net earnings from self-employment were $400 or more; or
- You had church employee income of $108.28 or more.
Though the self-employment tax is in addition to your income tax, you can deduct one-half (50 percent) of your SE tax as an adjustment to income on the front of your tax return.
What does it mean to be self-employed?
Any activity you perform to make a profit is considered a business (or trade). The business can be:
- Full-time;
- Part-time; or
- In addition to your regular job (For example: You’re a full-time employee working for someone else and you fix lawnmowers on weekends. You have your own shop, equipment, tools, and advertise your services. You’re self-employed as the owner of the part-time repair shop.)
You can be:
- The owner or sole proprietor of the business,
- A member of a partnership, or
- An independent contractor.
If you have self-employment income, you may be required to pay your taxes quarterly. See How does this affect me? section, below.
Determine your net income (profit)
Once you determine you’re self-employed and had income, you need to determine your net profit from the business. This is done by taking all your businesses income and subtracting any expenses or losses. Some businesses have a profit and loss statement that they generate throughout the year.
Generally, if your business(es) had a net loss (your expenses are more than your income) for the year, you aren't subject to self-employment (SE) tax.
Calculate your SE Tax
Once you determine the net profit from all your businesses, you’re ready to compute your SE tax, using IRS Schedule SE, (IRS Form 1040) Self-Employment Tax. The form will walk you through the calculation for the SE tax, since different lines are used for different types of income. The schedule also helps you calculate the deduction you’ll take for the one-half of the SE tax. This goes on the front of your IRS Form 1040 tax return in the “adjustments” section. Finally, send the Schedule SE to the IRS with your return.
The IRS instructions for the Schedule SE are a good source for understanding the special rules.
If you believe you've been incorrectly classified as an independent contractor, you can file a form with the IRS to correct this.
Quarterly Taxes
If you’re subject to self-employment (SE) tax and income tax, you’re generally required to file an annual return and pay estimated tax quarterly. It is important to look at your business profit and loss during the year to find out if you need to make estimated payments. If it looks like you’ll be paying SE tax, you’ll likely need to make the payments. You could be subject to a penalty if you don’t have enough withholding or estimated payments on your account.
Social Security
It is very important for you report all your self-employment income properly and pay the SE tax. The Social Security Administration (SSA) uses this information to calculate your benefits. If the information is not correct, it could reduce your benefits. Information on how credits are determined by SSA can be obtained at the SSA website: www.ssa.gov
SSA will only give you credit for self-employment income reported on a tax return within three years, three months and 15 days after the taxable year you earned the income. If you report a change after the time limit, SSA may change its records, but only to remove or reduce the amount.
Browse common tax issues and situations at Get Help.
If your IRS problem is causing you financial hardship, you've tried repeatedly and aren't receiving a response from the IRS, or you feel your taxpayer rights aren't being respected, consider contacting the Taxpayer Advocate Service (TAS).
You may be eligible for representation from an attorney, certified public accountant (CPA), or enrolled agent (EA) associated with a Low Income Taxpayer Clinic (LITC). LITCs also provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language.
Options for Filing a Tax Return
