Self-Employment Tax

Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners.

If you earned income as a statutory employee, you do not pay SE tax on that income.

Social security coverage. Your payments of SE tax contribute to your coverage under the social security system if you are covered. Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits. Social security benefits are available to self-employed persons just as they are to wage earners.

By not reporting all of your self-employment income, you could cause your social security benefits to be lower when you retire.

How to become insured under social security. You must be insured under the social security system before you begin receiving social security benefits. You are insured if you have the required number of credits (also called quarters of coverage), discussed next.

Earning credits in 2001 and 2002. For 2001, you received one credit, up to a maximum of four credits, for each $830 ($870 for 2002) of income subject to social security. Therefore, for 2001, if you had income (self-employment and wages) of $3,320 that was subject to social security taxes, you received four credits ($3,320 × $830).

For an explanation of the number of credits you must have to be insured, and of the benefits available to you and your family under the social security program, consult your nearest Social Security Administration office.

Making false statements to get or to increase social security benefits may subject you to penalties.

The Social Security Administration (SSA) time limit for posting self-employment income. Generally, the SSA will give you credit only for self-employment income reported on a tax return filed within 3 years, 3 months, and 15 days after the tax year you earned the income. If you file your tax return or report a change in your self-employment income after this time limit, the SSA may change its records, but only to remove or reduce the amount. The SSA will not change its records to increase your self-employment income.

Who must pay self-employment tax. You must pay SE tax and file Schedule SE if either of the following applies.

1. Your net earnings from self-employment (excluding church employee income) were $400 or more.
2. You had church employee income of $108.28 or more.

The SE tax rules apply even if you are fully insured under social security or have started receiving benefits.

Methods for figuring net earnings. There are three ways to figure net earnings from self-employment.

• The regular method
• The nonfarm optional method
• The farm optional method

You must use the regular method unless you are eligible to use one or both of the optional methods. Multiply your total earnings subject to SE tax by 92.35% (.9235) to get your net earnings under the regular method.

Why use the optional methods? You use the optional methods when you have a loss or a small net profit and any one of the following applies.

• You want to receive credit for social security benefit coverage.
• You incurred child or dependent care expenses for which you could claim a credit. (An optional method may increase your earned income, which could increase your credit.)
• You are entitled to the earned income credit. (An optional method may increase your earned income, which could increase your credit.)

SE tax rate. The SE tax rate on net earnings is 15.3% (12.4% social security tax plus 2.9% Medicare tax).

Maximum earnings subject to SE tax. Only the first $80,400 of your combined wages, tips, and net earnings in 2001 is subject to any combination of the 12.4% social security part of SE tax, social security tax, or railroad retirement (tier 1) tax.

All your combined wages, tips, and net earnings in 2001 are subject to any combination of the 2.9% Medicare part of SE tax, social security tax, or railroad retirement (tier 1) tax.

If your wages and tips are subject to either social security or railroad retirement (tier 1) tax, or both, and total at least $80,400, do not pay the 12.4% social security part of the SE tax on any of your net earnings. However, you must pay the 2.9% Medicare part of the SE tax on all your net earnings.

Deduct one-half of your SE tax as an adjustment to income on line 27 of Form 1040.

More information. For more information on the SE tax, see Publication 533, Self-Employment Tax.

Previous| First | Next

Publication Index | IRS-Forms Main | Home