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Self-employment Taxes

Self-employment tax must be paid whether you have full-time or part-time business income. If you work for someone else as an employee you may still have some self-employment income. As long as your business is not incorporated, it’s likely that your net business income will be subject to self-employment taxes. You are required to pay self-employment taxes on your self-employment income even after you retire and receive Social Security benefits. Please note that anytime self-employment tax is mentioned, it only refers to Social Security and Medicare taxes and does not include any other taxes that self-employed individuals may be required to file.

Do you need to pay self-employment tax? You must pay self-employment tax and file schedule SE (Form 1040) if either of the following applies:

  • your net earnings from self-employment (excluding church employee income) was $400 or more, or
  • you had church employee income of $108.28 or more.

What IRS tax forms do self-employed file? If you are self-employed as a sole proprietor or independent contractor you generally use a Schedule C or C-EZ to figure net earnings from self-employment. Taxpayers with more than one business producing self-employment income must combine the net profit or loss from each to determine the total earnings subject to self-employment taxes. If your business showed a net loss, you won’t owe self-employment taxes, but you will still need to file Schedule C to report your loss.

Self-employment tax is similar to the Social Security and Medicare Tax withheld from the pay of most wage earners. You can deduct the employer equivalent portion of your self-employment tax in computing your adjusted gross income. The 2010 Tax Relief Act reduced the self-employment tax by 2% for self-employment income earned in 2011. The reduced rate of 13.3% was extended to apply to 2012.

What are the benefits of being self-employed? There are benefits to being self-employed including deductions for:

  • self-employment retirement plans
  • self-employment tax
  • home office
  • health insurance premiums
  • meals and entertainment expenses
  • internet and phone
  • interest on business loans and credit cards
  • vehicle expenses on local business trips
  • overnight travel outside your city limits for business purposes
  • education