Self-Employment Tax

As we all know, income may be earned in a number of ways. Some individuals, for example, earn a living while acting as their “own boss” (an entrepreneur, perhaps), operating small family businesses (restaurant owners), or by working as independent contractors (plumbers). These “self-employed” persons, of course, are still required to pay taxes on earnings. While Form 1040’s Line 12 is used to calculate income tax liability for such persons, Line 56 is where Social Security and Medicare taxes (the so-called “self-employment tax1”) are to be reported. Calculating self-employment tax liability involves preparing a Schedule SE (Schedule C should have already been completed when calculating Line 12 business income).

Schedule SE requires taxpayers to complete either a “Short Schedule” or a “Long Schedule” section; Schedule SE provides a flowchart to determine which section is appropriate for a particular taxpayer. Generally, taxpayers with only Schedule C, sole-proprietor income are permitted to use the Short Schedule (this is the case for the majority of self-employed taxpayers). Self-employed taxpayers who received any income reported on a Form W-2 (e.g., traditional employer-employee wages), however, must use the Long Schedule. Such taxpayers should collect any and all Form W-2’s from the tax year – they may have already paid some Social Security and Medicare taxes (see Boxes 3 and 7, respectfully) and be entitled to a dollar-for-dollar reduction in self-employment tax liability. For more information on completing Schedule SE, consult these Instructions.

Once a taxpayer completes Schedule SE, he/she should transfer the Line 5 (Short Schedule) or Line 12 (Long Schedule) value to Line 56 of Form 1040. And now for some good news (amidst all of this tax computing) – half of one’s self-employment taxes are deductible on Line 27 of Form 1040!

1An individual’s self-employment tax liability is equivalent to the sum of Social Security and Medicare taxes paid by both employees and employers in a traditional employment relationship. Put another way, the self-employment tax rate is generally 15.3% while traditional employers and employees only pay 7.65%, respectively, in Social Security and Medicare taxes.

Photo by: WorldSkills UK