Does Self Employment Tax Include Social Security Tax?

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  • Self-employment tax is comprised of both Social Security and Medicare taxes. Most self-employed taxpayers pay SE tax quarterly along with proposed income tax.

Does Self-Employment Tax Include Social Security Tax?

Yes, self-employment tax is a tax made up of Social Security and Medicare taxes that are paid by self-employed individuals. Both are the same type of taxes that are normally withheld from the paychecks of wage-earning taxpayers by their employers, the cost of which is split between the employer and the employee. Self-employed individuals must pay the full amount of tax due on their own since they have no employer. Self-employed taxpayers may owe additional types of tax beyond the self-employment (SE) tax, including income tax.

How Is Self-Employment Tax Calculated?

The Internal Revenue Services (IRS) provides Schedule SE for self-employed persons to use in figuring their SE tax. The total rate of SE tax is 15.3%, which includes 12.4% for the taxpayers’ Social Security contribution and 2.9% for the individuals’ Medicare (or hospital) insurance. For 2020, the first $137,700 of wages, tips, and other earnings is subject to self-employment tax. Once income reaches the $137,700 threshold, it is not subject to Social Security tax, but it is subject to Medicare tax of 2.9%. Incomes over $200,000 per year pay a 3.8% Medicare tax with no cap on the amount of taxable income.

Who Is Required to Pay Self-Employment Tax?

The IRS considers a self-employed individual to fall under one of three categories, including:

  • An independent contractor or sole proprietor carrying on a business or trade.
  • A member of a partnership that carries on a business or a trade.
  • Individuals otherwise in business for themselves, even if the business is part-time only.

Traditional employees split the 15.3% total cost for Social Security and Medicare tax with their employers. Self-employed taxpayers are responsible for the full amount.

Taxpayers with net earnings from self-employment totaling $400 or more during the year must pay self-employment tax and file a Schedule SE (when filing Form 1040 or 1040-SR). Taxpayers with church employee income must pay SE tax and file Schedule SE once they earn $108.28. Rules regarding self-employment tax are applicable to all taxpayers, regardless of age, even those taxpayers who are already receiving benefits from Social Security and/or Medicare. Taxpayers must have a Social Security number or individual taxpayer identification number (ITIN) in order to pay SE tax.

In general, net earnings from all self-employment activity are subject to the SE tax. Most self-employed independent contractors and sole proprietors use Schedule C to figure their earnings from self-employment activity. Prior to figuring net earnings, the taxpayer generally needs to figure the amount of total earnings that are subject to SE tax.

What Are Self-Employment Tax Deductions?

There are two tax deductions available only to taxpayers who pay self-employment tax. The first allows the taxpayer to deduct the portion of the self-employment tax that would normally be covered by an employer from their adjusted gross income. This affects the amount of income that is taxable, and thus, the amount of tax owed to the government.

The second deduction was created under the Small Business Jobs Act and allows self-employed taxpayers to take a deduction for the cost of health insurance. The deduction is used in calculating net self-employment earnings.

When Do You Pay Self-Employment Tax?

Most self-employed taxpayers pay quarterly taxes, which involves paying approximately one-fourth of the amount of tax that will be due for the tax year at the end of each quarter. This eliminates the need to pay a larger lump sum when filing a tax return for the year and avoid being assessed a penalty for underpayment. Self-employment tax is just one type of tax that is paid in quarterly installments. Self-employed taxpayers make estimated tax payments on all taxes that will be owed, including self-employment tax, income tax and any alternative minimum tax to be assessed.

As a general rule, quarterly tax payments are due by the 15th of the month following the close of each quarter. For instance, the first quarter of the year runs from January 1 through March 31, and quarterly tax payments for that period must be sent to the IRS by April 15. Essentially, one-fourth of the tax that will be due for the year should be paid on April 15, June 15, September 15 and January 15 of the following tax year.