What Is Self-Employment Tax? Schedule SE Explained
A question our tax team here at Stride regularly receives is “What is self-employment tax?” Today we are going to answer that question for our members!
Why Do I Have to Pay the Self-Employment Tax?
When you’re self-employed, you are required to pay taxes on your income that are the equivalent of what an employer typically pays on behalf of employees for taxes. Because you don’t have an employer paying these taxes for you, it is your responsibility to calculate and pay them.
There are two parts of the self-employment tax.
Social Security: You will pay taxes of 12.4% on up to $128,400 of your business profit.
Medicare: You will pay taxes of 2.9% on your business profit.
Typically, you’ll first fill out a Schedule C form for your independent business to calculate your total profit (earnings - expenses = profit). The Schedule C is where you list all the awesome tax write offs (like mileage and cell phone deductions) you’re entitled to as an independent worker! After you get an idea of business profit (or sometimes business loss in certain cases), you’re ready to use the Schedule SE to determine how much in taxes you’ll owe on that business profit.
Filling Out the Schedule SE
Tax forms are complicated, which is why the IRS has made simplified versions of the most commonly used forms (the Schedule C has a Schedule C-EZ). Guess what! There’s also a simplified Schedule SE aptly named the Short Schedule SE.
The IRS developed a really helpful chart for you to determine whether you qualify for using the Short Schedule SE (Hint: only if you earned over $128,400 in wages and tips will you NOT be able to use the Short Schedule SE).
Line-by-Line Breakdown of the Short Schedule SE, Section A
Line 1a: Net farm profit - This applies to farmers where they note their total profit or loss
Line 1b: Social Security, Retirement, or Disability - Enter here the amount you’ve received from any of these programs
Line 2: Net profit (or loss) from the Schedule C - Here is where you’ll write in the profit or loss from your Schedule C
Line 3: Add it all together - This line is where you sum the numbers you wrote above
Line 4: Calculate your tax obligation - This is where you multiply the line above (3) by 92.35% (.9235). If this amount is less than $400, then you do not need to pay any self-employment tax. Write the total amount after multiplying on this line.
Line 5: Self-employment tax - If the amount on line 4 is:
$128,400 or less: multiply line 4 by 15.3% (.153). Enter the result here and on Form 1040, line 57, or Form 1040NR, line 55
More than $128,400: multiply line 4 by 2.9% (.029). Then, add $15,921.60 to the result. Enter the total here and on Form 1040, line 57, or Form 1040NR, line 55
Line 6: Deduction for one-half of self-employment tax - Multiply line 5 by 50% (.50). Enter the result here and on Form 1040, Line 27, or Form 1040NR, line 27.
Yes! This line means you get to deduct one half of the amount you’ll pay for self-employment tax. This is deducted from your total taxable income that’s subject to the income tax (calculated on the 1040). This is where the IRS makes sure you pay a lower amount on overall income tax because of the self-employment tax you pay (as mandated by Self-Employment Contributions Act).
Remember to plug the final amount from Line 4 into your 1040. Once you’ve done that, you are done with calculating your self-employment tax!