Most wage earning Americans are familiar with payroll taxes. These flat taxes are taken out of paychecks to fund Social Security, Medicare, and Medicaid. Most taxpayers are also aware that their employers match their contributions to these programs.
What you may not know is that self-employed individuals are required to pay the portion usually paid by employers. This extra contribution to Medicare, Medicaid, and Social Security paid be self-employed individuals is referred to as the self-employment tax. You may be required to pay self-employment tax if you were self-employed or worked on contract either full- or part-time.
Form 1040 Schedule SE is the form used by taxpayers to figure the amount owed in self-employment tax. If you are self-employed and had net earnings from self-employment totaling more than $400, your Form 1040 must include a Schedule SE.
You must also file a Schedule SE if you have a ministry income of more than $108.28. (There are exemptions for religious workers who filed Form 4361 and received IRS approval not to be taxed on those earnings.)
To fill out the Schedule SE, you’ll need certain data about your business handy. Most of this information is available on other schedules, depending on the source of the income. Here’s a quick list of what you may need to fill out the Schedule SE and where you’ll find it, depending on your tax situation:
- Net farm profit or loss from Schedule F, line 36, and farm partnerships, Schedule K-1 (Form 1065) box 14, code A
- Any amount received in Conservation Reserve Program payments, Schedule F, line 6b
- Net profit or loss from Schedule C, line 31; Schedule C-EZ, line 3; Schedule K-1, line 14 if income from other than farming; and Schedule K-1, line 9, code J1
- Filers with income from typical employment will want their W-2s handy
Using this information and the Schedule SE, you’ll total the amount of income you have that is subject to self-employment tax. For most self-employed individuals, the Social Security portion of the self-employment tax is required on up to $106,800 of income.
If you pay social security taxes on other income that is not from self-employment, you may be responsible for less self-employment tax. If you have income from other wages, the Schedule SE will lead you through recording income from other sources and determining how much extra Social Security tax you owe. You’ll also figure the amount owed in Medicare and Medicaid taxes by multiplying your net income from self-employment by 2.9%.
For some filers, including those with income from farming or religious work, the Schedule SE can be a little more complicated.
Farmers have several options when it comes to filling out the Schedule SE. There optional reporting methods that a farmer may elect to use depending on the amount of gross income or net profits. If you’re a farmer in this situation, it may be wise to consult a tax professional. A seasoned pro can help you make sure you comply with all relevant tax laws, and hopefully help you minimize your tax obligation in the process.
Regardless of the type of business that produces your self-employment income, make sure you deduct any business expense you are legally entitled to deduct. Every dollar you can deduct from your net income is money saved in self-employment taxes.
If you have a large amount of self-employment income, consider seeing a tax professional amount the corporate arrangement most advantageous for tax purposes. Should you need help filing your taxes this year, you may also want to consider both Turbo Tax and H&R Block. Their free online tax software can make your tax nightmares disappear.
Published or updated April 4, 2013.