Self-Employment Tax

Self-employed individuals whose net self-employment income is $400 or more are subject to the Self-Employment Contributions Act (SECA) tax, in addition to federal income tax. If net self-employment income is $400 or more, than all self-employment income is subject to the tax. The SECA tax rate is 15.3%. This rate is equal to the rate that the employer and employee jointly pay. Self-employed individuals must pay the full amount based on their earnings from self-employment. However, self-employed individuals may deduct one half of the combined rate times their net earnings from self-employment in computing the SECA tax. Alternatively, for income tax purposes, such taxpayers may deduct one half of the SECA tax imposed for the tax year as a business expense in computing adjusted gross income.

Beginning in 2013, the employee half of the hospital insurance tax portion (i.e., 1.45%) of this tax is increased by an additional tax of 0.9% on employment wages over $250,000 for married taxpayers who file jointly and surviving spouses, $125,000 for married taxpayers who file separately, and $200,000 for other individuals. These threshold amounts are reduced, but not below zero, by the amount of wages that are subject to FICA taxes.

The tax Code exempts from SECA tax net self-employment income in excess of the old-age, survivors, and disability insurance (OASDI) wage base (adjusted annually), minus the amount of wages paid to you by your employer that are subject to FICA taxes. If the income on which you paid SECA tax exceeds the OASDI wage base, the income beyond the base is not subject to the OASDI portion of the SECA tax. All earned income is subject to the hospital insurance portion of the SECA tax. However, beginning in 2013, the additional tax mentioned above is not factored into the computation of the amount that self-employed individuals may deduct.

Your “net earnings from self-employment” are your gross income derived from your trade or business less allowable deductions attributable that trade or business. You also must add guaranteed payments for any services that you performed for a partnership of which you are a member. Generally, amounts that are excludible from gross income are not taken into account in determining net earnings from self-employment.

The SECA tax is computed on Schedule SE of Form 1040. The amounts reported on Schedule SE are in most cases taken from Schedule C of Form 1040. The amount of the SECA tax computed on the Schedule SE is reported on the Form 1040.