How to File Schedule SE for Self-Employment Tax
Calculating Self-Employment Tax for Social Security and Medicare
Self-employment tax is based on the income of a business owner and it's collected for Social Security and Medicare taxes and benefits. The amount you must pay for self-employment tax depends on the profit or loss of your business for the tax year.
Self-employment tax is calculated on Schedule SE. There is a short form and a long form, depending on the situation. This discussion will focus on the short form and relatively simple self-employment situations. Get help from a tax professional if you find your situation is more complex.
If you are using tax preparation software for a business, the program will calculate self-employment tax for you.
Social Security and Medicare Taxes
Everyone pays Social Security and Medicare taxes, but how much you pay and how you calculate it differs depending on whether you're self-employed or you work for someone else.
Most people work for someone else and have their Social Security and Medicare taxes collected and withheld from their earnings by their employer. They pay half and their employers match their contributions, paying the other half.
Self-employed business owners don't take a paycheck, so no taxes are withheld from their income.
To avoid penalties for late payment and underpayment of taxes, you will probably need to pay estimated taxes for business income tax and self-employment tax during the year.
FICA Tax Rates for Employees and Employers
The combination of Social Security and Medicare tax is called FICA tax. The FICA tax rate is 6.2% for the employer and 6.2% for the employee, or a total of 12.4%. The Medicare rate is 1.45% for the employer and 1.45% for the employee, or a total of 2.9%. The total FICA tax is 15.3%.
Social security taxes are capped each year at a specific amount for the employee and for the self-employed business owner (but not for the employer).
Medicare taxes are not capped each year. An additional Medicare tax of 0.9% is added to withholding for employees and self-employed individuals over a specific amount.
The Self-Employment Tax Rate
The self-employment tax rate is 15.3%, with 12.4% for Social Security and 2.9% for Medicare. (the same as the combined employee and employer FICA tax rate). As noted above, if you are self-employed, you must pay the additional Medicare tax if your income is over a certain amount.
It seems unfair that self-employed business owners have twice as much tax to pay as employees, but you do get to take a deduction for the employer-equivalent part of your self-employment tax (half of the tax amount). This deduction only affects your income tax; it doesn't affect your net earnings from self-employment or your self-employment tax.
Who Must Pay Self-Employment Tax
You must pay self-employment tax and file Schedule SE if your earnings from self-employment were $400 or more for the year. Self-employed business owners include:
- Sole proprietors and owners of single-member limited liability companies (LLCs) who file business taxes on Schedule C along with their tax returns
- S corporation owners who file a Schedule K-1 for their share of the income of an S corporation, and
- 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, employment earnings are 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
Determine Total Self-Employment income. To calculate self-employment tax, you must first determine your total income from your business — or, if you own several businesses, from all of them added together. You will use Schedule SE to calculate your self-employment tax.
The calculation of self-employment income is simple if you have just one business and you report business taxes on Schedule C. If you have partnership or S corporation income, the calculation is more complicated.
Short Form vs. Long Form. If you had no income all year other than your self-employed income and you meet certain other qualifications, you might be able to complete the short form, which is Section A. Otherwise, you must complete the long form, Section B.
Calculating the Tax and the Deduction on Schedule SE
Calculate the Self-Employment Tax. For simplicity, let's assume you have self-employment income from one business and that you have no income from employment.
Check the amount of the Social Security maximum for the year before you begin this part of the calculation.
Line 2. Enter your total self-employment income for the year.
Line 4. Multiply this number 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 5. Calculate the self-employment tax.
- If the amount in line 4 is equal to or less than the Social Security maximum for the year, multiply the number by 15.3%.
- If the amount in line 4 is more than the Social Security maximum, subtract the maximum amount from your total income and multiply the difference by 2.9%.
You will also need to calculate the additional Medicare tax amount if your total income is over the threshold amount. This is a complicated calculation.
Calculate the Deduction. Multiply the total in Line 5 by 50% and enter the result on Schedule 1, Line 14 of your tax form.
An Example for the Short Form
Line 2. Total self-employment income: $124,000.
Line 4. $124,000 x 92.35% (0.9235) = $114,514.
Line 5. Calculate the self-employment tax.
- $114,514 x 15.3% (0.153) = $17,520.00
- The amount in Line 4 is less than the Social Security maximum and the additional Medicare tax threshold.
To calculate the deduction: $17,520 x 50% (0.50) = $8,760.00
Schedule SE on Your Tax Return
You'll enter the Schedule SE calculation on IRS Form 1040 in two places.
First, Schedule 1, Line 27, which reduces your adjusted gross income by half of the self-employment tax amount.
Then, go to Schedule 4, Line 57 to include the total self-employment tax owed in addition to personal income taxes. The amount on Line 57 is added to your personal income tax calculation along with some other taxes to show your total federal tax liability for the year.
Disclaimer: This article includes a general overview, but the self-employment tax calculation process can be complicated. Get help from a tax professional or use a business tax software preparation program to compute the tax.