Self-employment tax is how individuals who work for themselves pay their social security and Medicare taxes. These taxes are normally withheld from the pay of most wage earners and are reflected as deductions on their W-2s. You may still have to pay this tax if you are an employee and these taxes are withheld from your wages, and you also have income from an additional business or trade. People in professional trades such as physicians, accountants and contractors who offer their services to the general public are generally independent contractors whose earnings are also subject to SE tax. You must pay SE tax and file Schedule SE if either of the following applies:
- your net earnings from self-employment were $400 or more, or
- you had church employee income of $108.28 or more.
Figure your SE tax using Schedule SE. Social security and Medicare taxes of most wage earners are figured by their employers, who pay half and deduct the other half. The self-employment tax rate is 15.3% and consists of two parts: 12.4% for social security and 2.9% for Medicare. Only the first $106,800 (the limit changes annually) of your combined net earnings is subject to the 12.4% social security part of the SE tax. All your net earnings are subject to the 2.9% Medicare part of the SE tax.
If you use a tax year other than the calendar year, use the tax rate and maximum earnings limit in effect at the beginning of your tax year. If the tax rate or maximum earnings limit changes during your tax year, continue to use the same rate and limit throughout your tax year. If your income tax, including your SE tax, is expected to exceed $1,000 when you file your return, you generally need to make estimated payments. If you don’t make quarterly payments, you can be penalized for underpayment at the end of the tax year.
You can deduct half of your SE tax as an adjustment to your gross income. This deduction only affects your income tax. It does not affect either your net earnings from self-employment or your SE tax.
Special rules apply to caregivers, workers who perform in-home services for elderly or disabled individuals. Caregivers are typically employees of the individuals for whom they provide services, because they work in their homes and these individuals have control over how and when the caregivers work. Sometimes, however, the caregivers are independent contractors. If the caregiver is a family member, the employee may or may not be subject to employment taxes even though his or her income is reported on a Form W-2 or 1099-MISC.
For example, if someone is paid by a state agency to take care of their permanently disabled spouse (despite no formal medical training), versus someone who runs an assisted living home and is paid by the state to also take care of their grandparent. The person in the first example reports the income as “Other Income”, while the woman in the second example is subject to SE and other income taxes.