Social Security and Medicare Tax for the Self-Employed

How Do Self-employed Business Owners Pay Social Security and Medicare?

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Employees and their employers pay Social Security and Medicare taxes based on the income level of the employee. Each contributes to this tax payment, half and half. These taxes are called FICA taxes.

How Do Self-Employed Business Owners Pay Social Security and Medicare?

Self-employed individuals also are required to pay Social Security and Medicare tax, but they do it differently. The owners of small businesses pay Social Security and Medicare taxes on the profits of the business. These taxes are called, collectively, "Self-employment Taxes."

Sometimes these taxes are referred to as SECA taxes. SECA stands for {(Self-employment Contributions Act) includes OASDI (Old Age, Survivors, and Disability Insurance), otherwise known as Social Security, and Health Insurance (commonly known as Medicare).

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). 

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. 

How Is a Business Owner's Taxable Income Determined 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 determined on Schedule C of the owner's personal tax return. The result is a net income figure.
  • The taxable income of a partner in a partnership, a member of a multiple-member LLC, or the owner of an S corporation pays self-employment tax on his or her distributive share of the company's income.

The taxable income of the owner in all of these cases is included on the owner's personal tax return. 

Does an Owner of a Corporation Pay Self-Employment Tax?

Owners (shareholders) of a corporation are taxed on dividend income, which isn't relevant for self-employment tax purposes. If an owner works in the corporation, he or she is an employee and pays FICA tax. 

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. 

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. 

How to Minimize SECA Tax and Maximize Social Security Earnings

It's tricky. You may want to minimize the SECA tax you are paying, by increasing taxable deductions in your business. But your business income may be your ticket to social security benefits in retirement.