What is Self Employment Tax?
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In the United States, self employment (SE) tax is the tax primarily levied upon individuals who work for themselves — self-employed people. The self-employment tax is a social security and Medicare tax that is very similar to the taxes withheld from the wages of people employed by another person or business — employees.
Sole proprieters, owners of small businesses, and independent contractors are examples of self-employed people. You can be self-employed and work part time or full time as long as you are working for yourself. Basically, if you work for yourself and someone else does not pay your tax, you must pay the self employment tax.
The self employment tax is currently 15.3%. Medicare accounts for 2.9% and social security accounts for the other 12.4%. The social security portion of the self employment tax is based on the first 94,200 US dollars (USD) the taxpayer receives as income. Therefore the most an individual would pay in terms of the social security portion of the self employment tax is 11,680 USD. The Medicare portion of the tax does not have a cap on the income on which it is based; it is based on the taxpayer's total income. For both of these portions of the self employment tax, the taxpayer's income includes combined wages, tips, as well as net earnings.
To pay self employment tax, the taxpayer must have a social security number (SSN) or, alternatively an individual taxpayer identification number (ITIN). SSNs may be applied for using Form SS-5. Non-resident aliens and resident aliens that do not have and are ineligible for a SSN will receive a ITIN from the Internal Revenue Service (IRS). ITIN applications may be made with a Form W-7.
The self employment tax needs to be paid as you earn money throughout the year. You must make quarterly estimated tax payments if you think you will owe tax. Quarterly payments should be made using Schedule SE (Form 1040).
If you are self employed and your net earnings are 400 USD or more, then you must pay self employment tax. Also, if you are a church employee with an earning income of just over 108 USD or more, then you must pay the tax.
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I work full time for a major corporation and will earn enough to clear the 2009 FICA max contribution levels. I am doing some work on a real estate project on the side that will pay me a commission in excess of $5k for which I will receive a 1099 at year end.Given that between my full time employer and me, I will have covered the max contributions, will I still have to pay self-employment tax on the "side job" income? - dawgfan0
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If you are self employed and have a loss, there is no self employment tax. If you make less that $400 of self employment income, there is no self employment tax.Regarding 1099 Misc income. I do a lot of tax returns where people are given a 1099 misc instead of w-2's. You can request an IRS ruling to determine if you are actually an independent contractor, but many people are reluctant to do that because they need the job. - anon23616
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I am working part time for an employer that I used to work for full time 5 years ago. When it was time to file taxes, they gave me a 1099 rather than a w2, and I had to file as self employed and pay self employment taxes. I consider myself an employee. Is this legal? - anon15880
Editor's reply: check out our article, what is a 1099 contractor? for more information on how to determine if you are an independent contractor or an employee.
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The new Social Security wage base limit for 2008 is $102,000.00. To make your quarterly payments throughout the year you should use Form 1040ES. When you file your income tax return at the end of the year you will then use Schedule SE to report those taxes.
You don't need to pay self employment tax if your business had a net loss. - lbell
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Do you still pay self employment tax if you have a net loss from your business? - anon8209
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Written by
Garry Crystal
Last Modified: 23 November 2009
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