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Schedule SE is the last alphabetical schedule for Form 1040 and all of you who happen to be your own bosses are familiar with it. For everybody else’s benefit, though, let’s have a few terms explained first.
Self-employment income is income that arises from the performance of personal services, but which cannot be classified as wages because an employer-employee relationship does not exist between the payer and the payee. You can find the extensive list of other income and losses included in net earnings from self-employment, as well as income and losses not included in net earnings from self-employment, in the Instructions for Schedule SE. |
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The Internal Revenue Code imposes the self-employment tax on the self- employment income of any U.S. citizen or resident alien who has such self- employment income. As a self-employed individual you are also required to file an annual return and pay estimated tax quarterly.
As a general rule, you are self-employed if any of the following apply to you:
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- You carry on a trade or business as a sole proprietor or an independent contractor (including the member of a single member LLC that's disregarded for federal income tax purposes and a member of a qualified joint venture).
- You are a member of a partnership that carries on a trade or business (including a member of a multi-member limited liability company - LLC - that is treated as a partnership for federal tax purposes).
- You are otherwise in business for yourself (including a part-time business).
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Self-employed individuals must pay self-employment tax (SE tax) as well as income 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 are a sole proprietor (including an independent contractor), a partner in a partnership (including a member of a multi-member limited liability company), or are otherwise in business for yourself, and if you had net earnings from self- employment of $400 or more you are subject to self-employment tax.
You also must pay SE tax on: your share of certain partnership income and your guaranteed payments; on income you earned as a U.S. citizen employed by a foreign government; if you are a self-employed U.S. citizen or resident alien living outside the United States; or if you are a self-employed nonresident alien living in the United States, you must pay SE tax if an international social security agreement in effect determines that you are covered under the U.S. social security system. |
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If you had two or more businesses subject to self-employment tax, your net earnings from self-employment are the combined net earnings from all of your businesses. If you had a loss in one business, it reduces the income from another. Figure the combined SE tax on one Schedule SE.
If you file a joint return, show the name of the spouse with self-employment income on Schedule SE. If both spouses have self-employment income, each must file a separate Schedule SE. However, if one spouse qualifies to use Short Schedule SE (front of form) and the other must use Long Schedule SE (back of form), both can use the same form. One spouse should complete the front and the other the back.
If you and your spouse had community income and file separate returns, attach Schedule SE to the return of each spouse with self-employment earnings and Schedule(s) C, C-EZ, or F (showing the spouse's share of community income and expenses) to the return of each spouse.
An employee of a church or qualified church-controlled organization who elected exemption from social security and Medicare taxes must pay self-employment tax if the church or qualified church-controlled organization paid more than $108.28 to the employee, unless he or she is personally exempt from self-employment tax. (Income from services you performed as a minister, member of a religious order, or Christian Science practitioner isn't church employee income.) |
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As mentioned earlier, the tax is composed of Social Security and Medicare taxes in the form of a SECA (Self-Employment Contribution Act) tax for self-employment, and in the form of FICA (Federal Insurance Contributions Act) tax for employment.
The self-employment tax rate, as well as the employment tax rate, is set by Congress and is subject to change.
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In the last few years, SECA tax was set at 15.3% of net earnings (profit).
The self-employed person's tax rate for 2018 (January 1 through December 31, 2018) is 15.3% on the first $128,400 of net income plus 2.9% (Medicare tax) on the net income in excess of $128,400.
The self-employed person's tax rate for 2019 (January 1 through December 31, 2019) is 15.3% on the first $132,900 of net income plus 2.9% on the net income in excess of $132,900.
The maximum Social Security earnings are capped, and are set each year; if your Social Security income exceeds the maximum (the amounts mentioned above), no Social Security tax is imposed on the amount over the maximum.
Medicare tax is imposed on all net earnings. |
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Additional Medicare Tax also applies to self-employment income above the following threshold amounts: $250,000 for a married individual filing a joint return, $125,000 for a married individual filing a separate return, and $200,000 for all others.
Schedule SE is used to figure the tax due on net earnings from self-employment. The Social Security Administration uses the information from Schedule SE to figure your benefits under the social security program. This tax applies no matter how old you are and even if you are already getting social security or Medicare benefits.
To fill out Schedule SE with your yearly tax return, you will first have to fill out a Schedule C form (or Schedule F for farmers and Schedule K-1 for partnerships) to calculate your total profit.
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 of Schedule SE. Otherwise, you must complete the long form, Section B.
You should check the flowchart on page 1 of Schedule SE to see if you can use Section A—Short Schedule SE, or if you must use Section B—Long Schedule SE.
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If you realize a net business loss on Schedule C, you are not required to file Schedule SE and pay self-employment taxes.
However, the IRS provides an optional self-employment tax calculation method which may give you credit toward Social Security without increasing your taxes. |
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Actually, there is an optional method for self-employed farmers, and another optional method for other self-employed individuals. It may be to your benefit to file Schedule SE and use either "optional method" in Part II of Long Schedule SE.
Using the optional methods may also qualify you to claim the earned income tax credit, the additional child tax credit, or the child and dependent care credit, or give you a larger credit if your net earnings from self-employment (determined without using the optional methods) are less than $5,280.
You are allowed to deduct 50% (the employer-equivalent portion) of your self- employment tax in figuring your adjusted gross income on Form 1040. This deduction only affects your income tax. It does not affect either your net earnings from self-employment or your self-employment tax.
This deduction cannot be an itemized deduction and must not be listed on your Schedule C. |
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Beginning with 2018 taxes, the self-employment tax deduction must be entered in two places.
First, on Schedule 1, Line 27, which reduces your adjusted gross income by half of the self-employment tax amount.
Then, you have to 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.
To compensate for the lack of traditional payroll tax withholding by an employer, the IRS requires most self-employed individuals to make estimated quarterly tax payments. |
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If you expect to owe tax of $1,000 or more when you file your return, you generally have to make estimated tax payments. If you do not pay these taxes when due, the IRS may assess a substantial fine, even if you pay the full amount due by April 15.
When you’re in business for yourself, help from tax and financial professionals is a must. It is to your advantage to make sure that you include the right type of income on your tax return, fill out the necessary forms, take any deduction you may be entitled to, and pay just the right amount of taxes you are legally required to. |
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