How Does My Business Type Affect Self-Employment Tax?

Business Type and Self-employment Tax
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How Does My Business Type Affect Self-Employment Tax?

If you are self-employed, you must pay Self-employment tax (Social Security and Medicare tax) on your self-employment income.

How you pay those taxes and how they are calculated varies by your business type. Self-employment taxes are determined by your status and ownership percentage within the specific type of organization you own - sole proprietorship, partnership, LLC, or corporation. Self-employment tax is based on the net income of the business, and your share of that net income, depending on your share of the business. 

Self-employment tax is paid at a slightly different rate than employee/employer FICA tax. The self-employment tax rate is 15.3% - 12.9% for Social Security and 2.9% for Medicare. Social Security is paid up to an annual maximum; there is no annual maximum for Medicare. Higher income individuals may have to pay an additional 0.09% for Medicare tax. 

Note: If your business had a net loss, no self-employment tax is due. Self-employment tax is only due on net income, not losses. 

Self-employment Tax for a Sole Proprietorship or Single-Member LLC

If you are a sole proprietor or single-member LLC (which is taxed as a sole proprietorship), you are the sole owner of the business. As such, you pay self-employment taxes on the entire net earnings of the business.

First, you must determine the net income from your business, using Schedule C, one of the schedules in your personal tax return. Then the net income is used to calculate self-employment taxes using Schedule SE. The amount of self-employment tax liability is included in the owner's personal tax return on Line 57 of Form 1040. 

Self-employment Tax for a Partnership or Multiple-member LLC

Partners in a partnership and members in an LLC are considered self-employed individuals (not employees). Partnership income that is subject to self-employment tax depends on the type of partner you are and the type of income you receive from the partnership.

  • For general partners (or LLC members) treated as general partners) your distributive share and any guaranteed payments are subject to self-employment tax.
  • For limited partners (or if you are treated as a limited partner in your LLC( only your guaranteed payments are subject to self-employment tax, not your distributive share.

To calculate each partner's self-employment tax due:

1. First, the partnership completes an information return on Form 1065. This return shows the total net income of the partnership as a whole.

2. Then each partner's share of that net income is determined, based on his or her share of the partnership income. Partnership income share is determined by the partnership agreement. Partner share is shown on a Schedule K-1 that is completed for each partner,

3. Self-employment tax is then calculated using Schedule SE and the total self-employment tax liability is included on line 57 of Form 1040 for the individual partner. 

For example, if the partnership/LLC tax return shows total net earnings of $150,000, and there are three partners/members, each with an equal share, the earnings for each partner/member are $50,000. This amount is used to calculate the amount of self-employment tax owed by that partner or member.

Exceptions: Partners in a limited partnership are not considered self-employed, and partners in a partnership which is taxed as a corporation are not considered self-employed.

Self-employment Tax for Owners of a Corporation

As an owner of a corporation, you receive income from dividends. This income is not considered self-employment income and is not subject to self-employment tax. You may also receive compensation from your corporation, but this amount is considered employment income, not self-employment. Income from employment with a corporation is paid as FICA taxes at the employee rate, not the self-employed rate.