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. The term sole proprietor also includes the member of a single member LLC that is disregarded for federal income tax purposes and a member 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. You calculate net earnings 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 currently receive Social Security benefits.

If you had a loss or small amount of income from your self-employment, it may be to your benefit 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 give you credit toward your Social Security coverage, or increase your earned income credit or the child and dependent care credit.

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. If you are required to pay self-employment tax, you must file Form 1040 (PDF), U.S. Individual Income Tax Return and attach Form 1040, Schedule SE (PDF), Self-Employment Tax. 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.

The law sets the self-employment tax rate as a percentage of your net earnings from self-employment. This rate consists of 12.4% for Social Security and 2.9% for Medicare taxes. The law sets a maximum amount of net earnings subject to the Social Security tax. This amount 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, see Questions and Answers for the Additional Medicare Tax on IRS.gov.

Compute self-employment tax on Form 1040, Schedule SE (PDF). When figuring your adjusted gross income on Form 1040, you can deduct one-half of the self-employment tax. You calculate this deduction on Schedule SE. The Social Security Administration uses the information from Schedule SE to compute your benefits under the Social Security program.

Refer to the Form 1040, Schedule SE Instructions (PDF) and Publication 334, Tax Guide for Small Business, for more information on self-employment tax.

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Page Last Reviewed or Updated: January 29, 2015