Self-Employment Tax
Brand-new business owners are sometimes surprised to find out
that in addition to their federal income taxes, they must also pay
a significant percentage of their income to the government in the
form of SECA taxes.
The Self-Employment Contributions Act
(SECA) tax is basically the business owner's version of the FICA tax
that employees pay. Like FICA, it is made up of your "contributions"
to both the Social Security and Medicare programs. However, the basic
tax rate for the self-employed under SECA is 15.30 percent -- twice
the 7.65 percent rate that employees must pay on their paychecks as
FICA tax -- to reflect the fact that employees and employers pay one-half
the FICA tax and employers pay the other half.
In addition,
a 0.9 percent additional Medicare tax applies
to self-employment income exceeding a threshold amount. The threshold
amount is based on filing status ($250,000 for joint return, $125,000
for separate, and $200,000 in any other case) and is coordinated with
FICA wages. (The corresponding FICA surcharge is borne entirely by
the employee; there is no employer match. Presumably, this is why
there is no employer-equivalent deduction for self-employment tax
purposes.)
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Tip If your income is high enough to be subject to
this surtax, consider increasing the amount of your estimated tax
payments, in order to avoid a penalty come tax time. Your accountant
or advisor should be able to help you decide how much to pay. |
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What
income counts? For starters, you don't have to worry about
paying the SECA tax at all if your total business income, from all
Schedule Cs combined and from any partnership or S corporation income
that is treated as self-employment income, is less than $400. But
if your total income is $400 or more, you must file a Schedule SE
and pay SECA tax on your entire net business income, including the
first $400.
If you are filing jointly and your spouse also
files one or more Schedule Cs, each spouse must count his or her own
income separately.
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Example You own two small businesses and file
two Schedule Cs. Business A had net income of $80,000 and Business
B had a net loss of $5,000. Your spouse also operated a business
as a sole proprietor, and had net income of $20,000. On Line 12 of
your Form 1040, you would report all Schedule C income earned by both
you and your spouse: $80,000 + $20,000 - $5,000 = $95,000. However,
for SECA tax purposes, your total net business income would be $80,000
- $5,000 = $75,000. Your spouse's total net income for SECA purposes
would be $20,000. You must each file one Schedule SE and attach both
of them to your joint Form 1040. |
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Since it's the net income from your business that
is the basis of SECA tax, certain types of income are not included:
- interest and dividend income;
- income from sales of business property or
other assets;
- rental income from real estate or personal property, unless generating
that income is your core business (e.g., real estate developers or
property rental businesses);
and
- income from your hobbies.
Farmers. Farmers who file Schedule F with
their Form 1040 must include as self-employment income their net income
from farming, as shown on Line 36 of their Schedule F.
Some special rules apply to the following:
Once you know what types of income to count, you can:
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