Topic 554 - Self-Employment Tax

You are self-employed for this purpose 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 (LLC)), or are otherwise in business for yourself. (A sole proprietor also includes the member of a single member LLC that is disregarded for federal income tax purposes and members of a qualified joint venture.) You usually must pay self-employment tax if you had net earnings from self-employment of $400 or more. Generally, the amount subject to self-employment tax is 92.35% of your net earnings from self-employment. Net earnings are calculated by subtracting ordinary and necessary trade or business expenses from the gross income you derived from your trade or business. You can be liable for paying self-employment tax even if you are currently receiving social security benefits.

If you had a small profit or net loss from your business but want to receive credit toward your social security coverage, you may be eligible to use one of the two optional methods to compute your net earnings from self-employment. Refer to the Form 1040, Schedule SE Instructions (PDF) to see if you qualify to use an optional method. An optional method may increase your earned income credit or the child and dependent care credit.

The self-employment tax rate is a percentage set by law of your net earnings from self-employment. This rate consists of 12.4% for social security and 2.9% for Medicare taxes. The maximum amount of net earnings subject to the social security tax is set by law and changes annually. All of your net earnings are subject to the Medicare tax.

Additional Medicare Tax applies to self-employment income above a threshold amount received in taxable years beginning after December 31, 2012. The threshold amounts are $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. For additional information on the Additional Medicare Tax, see our questions and answers.

Self-employment tax is computed on Form 1040, Schedule SE (PDF), Self-Employment Tax. When figuring your adjusted gross income on Form 1040 (PDF), you can deduct one-half of the self-employment tax. This deduction is calculated on Schedule SE. The Social Security Administration uses the information from Schedule SE to compute your benefits under the social security program.

If you are an employee of a church or qualified church-controlled organization that elected exemption from social security and Medicare taxes, and you are not personally exempt from self-employment tax, you must pay self-employment tax if you are paid more than $108.28 in a year from the church or qualified church-controlled organization. If you are required to pay self-employment tax, you must file Form 1040 and attach Schedule SE. For more information on church related income and self-employment taxes, refer to Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers.

More information on self-employment tax can be found in Publication 334, Tax Guide for Small Business.

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Page Last Reviewed or Updated: February 27, 2014