Self-employed individuals have the great pleasure of filling out extra forms at tax time. There's no surprise here - and completing these forms shouldn't be difficult.
In addition to paying income taxes on the profits of their businesses, self-employed individuals must also pay a tax called self-employment tax. Using Schedule SE, you can calculate and report self-employment tax on your tax return.
However, how does the IRS classify "self-employment" income? And who is required to file Schedule SE?
Find out how to use Schedule SE to calculate self-employment tax and report it on your personal tax return with this guide.
What is Schedule SE?
The IRS Schedule SE is used by individuals to figure out how much self-employment tax they owe.
Form 1040, which you use to file your individual income tax return, has many schedules, including Schedule SE. You use this schedule to calculate your self-employment tax, which you report on Schedule 4 of Form 1040 (line 57).
A self-employment tax consists of both your Social Security and Medicare taxes, similar to the taxes withheld from your paycheck when you work for someone else.
Individuals who are self-employed are generally required to pay both self-employment tax and income tax.
How is the Schedule SE form used?
In order to determine your Social Security benefits, the Social Security Administration (SSA) uses information from the IRS about your self-employment taxes and payroll taxes.
You must pay self-employment tax on your net self-employment earnings regardless of your age or whether you are already receiving Social Security or Medicare benefits.
Who must complete Schedule SE?
Self-employed persons with taxable business income in excess of $400 must report this income on Schedule SE.
- Independent contractors and sole proprietors
- Members (owners) of limited liability companies LLCs
- Partners in partnerships
The owners and shareholders of S corporations do not have to file Schedule SE because they are not considered to be self-employed.
It is possible that if you are a clergy member, you should also file Schedule SE. This is true if you have clergy income of at least $108.28.
How Is Self-Employment Tax Determined?
You must pay Self-Employment Contributions Act (SECA) tax on your earnings as a self-employed business owner to fund Social Security and Medicare programs and calculate benefits. IRS Schedule SE is the form you use to report these earnings.
In addition to receiving Social Security or Medicare benefits, you must report your business income on Schedule SE if you have more than $400 of taxable business income for the year.
You determine your self-employment tax amount by adding the net income from all of your businesses on Schedule SE. Losses in one business can reduce the income from another.
As a self-employed person, you may include the following kinds of income as self-employment income for Social Security/Medicare benefits:
- Real estate rentals (unless you are in the business of selling real estate)
- Stock dividends
- A limited partnership
- Loan interest (unless your company lends money)
- Capital gains from the sale of an asset
You can deduct operating expenses, such as advertising, employee compensation and benefits, insurance, and payments to professionals, from your Schedule C. You can also deduct expenses for the part of your home you use for business, as well as driving expenses for the business.
What is the self-employment tax rate?
Normal self-employment tax rates for 2021 are 15.3%. There are two components:
- 12.4% Social Security tax
- 2.9% Medicare tax
The maximum amount subject to Social Security tax for 2021 is $118,500. However, all self-employment income over $400 is subject to Medicare tax.
Multiply your net business profit by 92.35% to figure out your net earnings from self-employment. This percentage is used since an employee is only required to pay one of these:
- Half of Social Security and Medicare taxes
- 7.65% of wage income
Individuals who are self-employed must pay "both halves," or 15.3%. By reducing the income subject to tax by 7.65%, the law equalizes the tax burden. The formula is as follows:
100% – 7.65% = 92.35%
On Form 1040, you can deduct the employer portion of your self-employment tax. Generally, you can deduct half of the employer portion. By doing this, you reduce your taxable income and, therefore, your federal income tax.
How to fill out Schedule SE
Schedule SE used to have a long and short version, but not anymore. There are now two parts to Schedule SE.
The majority of self-employed individuals will only fill out Part I. Part II contains two optional methods that must meet certain criteria in order to be used.
Part I: Self Employment Tax
Lines 1a and b relate to farming income, which you don't need to worry about unless you're a farmer.
Lines 2-4c will ask you to multiply your total net self-employment income by 92.35% to calculate your "net earnings," which is the part subject to self-employment tax. Fill in the final amount recorded in line 4c on line 6.
Line 7 represents the maximum amount of Social Security tax you can pay, $142,800. This figure is used to calculate lines 9 and 10.
On Lines 8a-d you'll record any earnings from jobs you've already paid Social Security tax on, such as wages and salaries. This information can be found on your employer's Form W-2.
Lines 9-10 calculate how much Social Security tax you owe.
Line 11 calculates how much Medicare tax you owe.
Line 12 combines the amounts found in Line 10 and Line 11 for your total self-employment tax amount.
On line 13, you will multiply your self-employment tax by 50%. Form 1040, Schedule 1, allows you to claim the resulting amount.
Part II: Optional Methods to Figure Net Earnings
You can use this section to elect one of the "optional methods," which might give you credit towards your Social Security coverage even if your income from self-employment was very small (less than $6,367) or you lost money.
However, be careful, this could also increase your self-employment tax. Before choosing one of the optional methods, speak to a tax professional.
When do I file Schedule SE?
Your Schedule SE information is included in your personal tax return (Form 1040-SR, or Form 1040).
The deadline for filing your return and paying any tax due is April 15. If the due date falls on a weekend or holiday, the next business day will be the due date.
Helpful Resource: List of Tax Deadlines
Paying Self-Employment Tax
In order to determine your taxable income, you include the amount of self-employment tax you owe each year minus the deduction with all other sources of income, along with the tax credits and deductions, on your personal tax return.
Tax payments made during the year are compared to this amount to determine how much you still owe on your total income.
As a business owner, you are not subject to withholding for business income taxes and self-employment taxes. To avoid underpayment penalties, you may have to make quarterly estimated tax payments throughout the year, as the IRS expects everyone to pay taxes during the year.
Helpful Resource: What are estimated taxes?
Can you deduct self-employment tax?
The IRS considers the employer portion of self-employment tax to be a deductible expense, so you can deduct 50% of self-employment tax.
You reduce your total taxable income on your return by deducting half of your self-employment tax. In this way, the equivalent employer portion of Social Security and Medicare taxes will be lowered for employees without affecting their Social Security and Medicare tax benefits.
No matter whether you itemize your deductions or take the standard deduction, you can claim the deductions you calculated above on line 27 of your Form 1040.
Help with IRS Schedule SE
Taxes for small businesses and self-employed people are more complicated than taxes for ordinary taxpayers. You may benefit from the assistance of a specialized tax pro, especially when you have to file complicated tax schedules like IRS Schedule SE.
Getting a tax preparer to assist you with Schedule SE is certainly worth the cost. Tax filing can be quite complicated depending on your business. You must also file Schedule C. You must file Schedule SE and Schedule C with your Form 1040. A professional accountant can help you make sure that you are filing all of the forms you need.
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