Social Security and Medicare Tax for the Self-Employed
How Self-Employment Taxes are Calculated and Paid
Everyone who works in the U.S. must pay taxes to fund Social Security and Medicare. For self-employed individuals, this is called Self-Employment Tax, sometimes called SECA Tax. It's similar to FICA taxes (Social Security and Medicare taxes paid by employees and employers).
How Do I Know If I'm Self-Employed?
You are self-employed for self-employment tax purposes, according to the IRS, if you:
- Carry on a trade or business, including being a sole proprietor or independent contractor,
- You are a partner in a partnership, or
- You are otherwise in business for yourself, even if it's part-time.
You are also self-employed if you are a member (owner) of a limited liability company (LLC). But you aren't considered self-employed if you are a shareholder of a corporation or S corporation.
What Is the Self-Employment Tax Rate?
For self-employment income earned in a particular year, 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).
Schedule SE is used to calculate your self-employment tax liability for your tax return. This calculation includes a deduction of half the amount of tax from your adjusted gross income. This deduction reduces your self-employment tax liability, but it doesn't change the amount for benefit calculations.
Social Security Tax. The Social Security portion is capped at a maximum amount, which changes each year. If your net earnings exceed the maximum that that year, you continue to pay only the Medicare portion of the SECA tax.
Additional Medicare Tax. There is also an additional Medicare tax of 0.9% for higher-income individuals. This rate begins at a set threshold amount each year.
What is My Income for Self-Employment Tax?
Business owners pay income taxes on their business income in different ways. The business income for self-employment tax purposes depends on the type of business:
- The taxable income of a self-employed owner of a sole proprietorship or single-member LLC is the net income (profits) of the business, as calculated on Schedule C of the owner's personal tax return.
- The taxable income of a partner in a partnership, a member of a multiple-member LLC is based on their share of the company's income.
How Is SECA Tax Calculated for Income Tax Purposes?
The amount of SECA tax is calculated and included in the owner's personal tax return in several steps:
Step 1: The business owner's taxable income is calculated, depending on the type of business owned, as described above.
Step 2: This income is used to calculate self-employment tax by using Schedule SE.
Step 3: Half of the calculated amount of the self-employment tax is deducted from the individual's taxable income on page 1 of the 1040 form.
Step 4: The rest of the self-employment tax is included in the calculation of taxes owed by the individual.
Like income taxes, self-employment tax isn't withheld from your payments as a business owner, so you may need to pay quarterly estimated taxes. Don't forget to include your estimated liability for self-employment taxes when you calculate your estimated tax payments.
What's the Difference Between SECA Tax and FICA Tax?
Employees who work in the U.S. pay Social Security and Medicare tax as required by the Federal Insurance Contributions Act (FICA).
Here's a table that details the differences:
|SECA Tax vs. FICA Tax|
|FICA Tax||SECA Tax|
|Who Pays||Employee and employer/ each pays half||Self-employed person pays total*|
|Based on||Employee wages/salary||Net income of business or partner share of net income|
|How Paid||Employee withholding/ Employer payments||With tax return|
|How reported/ calculated||Employee on Form W-2, Employer on quarterly tax report (Form 941)||Using Schedule SE on tax return|
*Minus half of the calculated tax amount for determining your adjusted gross earnings.
How Does SECA Tax Work If I Also Have Employment Earnings?
You may get a paycheck from an employer as well as having a side business that is profitable and gets you Social Security benefits. In general, your FICA earnings are considered first for Social Security benefits, but it's a little more complicated than that.
Read more about how the two types of taxes - FICA tax and SECA tax - work together to provide you with retirement benefits.
Should I Minimize My Business Earnings to Pay Less Self-Employment Tax?
It's tricky. If your business has no income or has a loss for a year, you don't have to pay SECA tax for that year. But that also means that self-employment income isn't included in your Social Security benefit calculations for that year. You may want to minimize the SECA tax (using tax avoidance NOT tax evasion). But your business income may be your ticket to Social Security benefits in retirement.