Everyone who works in the U.S. pays taxes on their income, including Social Security and Medicare taxes. How much you pay for these taxes and how you calculate it, though, differs depending on whether you're self-employed or you work for someone else. As outlined 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.
What Is Self-Employment Tax?
If you work for yourself, you are self-employed meaning you don't work for an employer. You must pay the Social Security and Medicare taxes as self-employment tax (SECA).
Self-employment tax is calculated using Schedule SE, a part of your personal 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 the profit or loss of your business for the tax year.
Schedule SE has been changed for the 2020 tax year, with the elimination of the short form option and the addition of a new Part III to calculate an optional deferral of part of self-employment taxes for 2020. The deferral option 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 tax.
While employees pay only half of the tax (the employer pays the other half), self-employed business owners pay the full amount, but they can deduct half the self-employment tax as a business expense. This deduction only affects your self-employment tax payment; it doesn't affect your net earnings from self-employment for benefit calculation purposes.
Social Security Cap 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 for employees, but not employers). If your income is over the cap, you don't have to continue paying the Social Security part of the tax that year. The Social Security maximum for 2021 is $142,800.
- Medicare taxes are not capped each year. An additional Medicare tax of 0.9% 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 must pay self-employment taxes 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 multiple-member LLCs who file a partnership return and who file Schedule K-1 for their share of partnership income on their tax returns.
If you have both employment earnings and self-employment earnings, the former is considered first for the Social Security maximum. You must pay Medicare tax on all your earnings with no maximum.
Calculating the Tax 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 Self-Employment Tax Calculation
For simplicity, let's assume you have self-employment income from one business and that you have no income from employment.
- Line 2: Net profit 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 don't owe self-employment tax and you don't need to file the form.
- Line 6: Assume you don't have church employee income or one of the optional methods, so this number is your self-employment earnings 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: See if you are subject to the Social Security maximum. If the number in Line 6 higher than $137,700, then $137,700 is the amount subject to self-employment tax.
- Line 10: Multiply the smaller of Line 6 or Line 9 and multiply by 12.4% (0.0124) to get the Social Security part.
- Line 11: Multiply Line 6 by 2.9% (0.029) to get the Medicare part.
- Line 12: Add Lines 10 and 11 to get your self-employment tax total.
- Line 13: Multiply Line 12 by 50% to get your deduction for one-half of the self-employment tax.
Part III Deferral of Self-Employment Tax Payments.
This section calculates the deferral for self-employed individuals for 2020.
The 2020 CARES Act for coronavirus relief includes a deferral of Social Security taxes for employees and self-employed individuals. You can defer paying 50% of the Social Security portion of self-employment taxes, for the period beginning March 27, 2020 to December 31, 2020. You may use any reasonable method to allocate your business income during the months between April and December.
Then, you must repay the deferral amount in two payments to the IRS :
- 50% by December 31, 2021
- 50% by December 31, 2022
The maximum deferral amounts are used to determine your equal repayment amounts, not the amount you actually deferred (if any).
A Simple Calculation Example
- Net Total self-employment income: $124,000. This amount is less than the Social Security maximum, so the full amount is subject to the tax. It's also less than the threshold for the additional Medicare tax, so no additional tax needs to be paid.
- Calculate amount subject to self-employment tax: $124,000 x 92.35% (0.9235) = $114,514.
- Calculate the 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 the 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 on Schedule 1 (Form 1040), Line 1 to claim the deduction for one-half of the self-employment tax.
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 elect to defer. You can defer any amount up to the maximum allowable, or not defer at all.
Where to Get Help
For more details on completing Schedule SE, see the IRS Instructions for this form. For 2020 taxes and the 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 done completely and correctly. If you are using business tax preparation software for a business, the program will calculate self-employment tax for you.