Self-Employment Tax

DEFINITION of 'Self-Employment Tax'

Money that a small business owner must pay to the federal government to fund Medicare and Social Security. Self-employment tax is due when an individual has net earnings of $400 or more in self-employment income over the course of the tax year. In any business, both the company and the employee are taxed to pay for these two major social welfare programs. When an individual is self-employed, she is both the company and the employee, so she pays both shares of this tax. Self-employment tax is computed and reported on IRS Form 1040, Schedule SE.

BREAKING DOWN 'Self-Employment Tax'

Individuals typically pay self-employment tax on 92.35% of their net earnings, not 100%. Self-employment tax is also a tax-deductible expense. Still, it represents a significant cost of being self-employed. The Social Security component of the self-employment tax phases out once net income reaches the low six figures, but all net income is subject to the Medicare tax. Self-employed individuals must pay self-employment tax as a condition of receiving Social Security benefits upon retirement.



RELATED TERMS
  1. Self-Employed

    A situation in which an individual works for himself or herself ...
  2. Self-Employed Person

    An independent contractor or sole proprietor who reports income ...
  3. Social Security Tax

    The tax levied on both employers and employees used to fund the ...
  4. Payroll Tax

    Tax an employer withholds and/or pays on behalf of their employees ...
  5. Transportation Expenses

    An expense incurred by an employee or self-employed taxpayer ...
  6. Self Employed Contributions Act ...

    A form of taxes that self-employed business owners must pay based ...
Related Articles
  1. Entrepreneurship & Small Business

    What Does It Mean To Be Self-Employed?

    A self-employed individual works for herself instead of working for an employer that pays a salary or hourly wage.
  2. Retirement

    How Social Security Works for the Self-Employed

    As both employee and employer, you have to pay more in Social Security, but there are deductions that can help lighten the tax burden.
  3. Personal Finance

    8 Tax Benefits For The Self-Employed

    Profitability in business depends on minimizing costs and maximizing resources. Here are several tax benefits that are available for the self-employed.
  4. Retirement

    Retirement Planning for the Self-Employed

    When you're self-employed, your retirement is entirely in your hands. Learn about the three retirement-savings options best suited to the entrepreneur.
  5. Personal Finance

    The Ultimate Tax-Time Checklist

    Find out what information you need to pull together before filling out your return.
  6. Personal Finance

    5 Most Taxing Taxes for Americans

    There’s not much that unites Americans like their hatred of taxes. Here's a list of taxes we dislike the most.
  7. Retirement

    Self Employed? Avoid These 3 Retirement Mistakes

    Having a strategy for retirement is particularly important when you're self-employed, as there are certain pitfalls you must watch out for along the way.
  8. Retirement

    Understanding Your FICA Payments

    The Federal Insurance Contributions Act is a U.S. law that requires a paycheck deduction be paid to Social Security and Medicare.
  9. Personal Finance

    How To Calculate AGI For Tax Purposes

    The first step in completing your taxes is calculating your adjusted gross income. Here’s how.
  10. Retirement

    10 Tax Benefits For The Self-Employed

    Running your own business has both personal and financial perks.
RELATED FAQS
  1. Do I still have to pay Social Security tax on my 2015 earnings?

    I retired in 2014. I started my own business in February 2015. I made about $1,500 in revenue in 2015,... Read Answer >>
  2. How is Social Security tax calculated?

    Find out how Social Security tax withholding is calculated, including the impact of the Medicare tax and the maximum taxable ... Read Answer >>
  3. How do I determine what to pay in taxes if my employer doesn't withhold payroll taxes?

    If your employer doesn't withhold payroll taxes, you'll need to know these points to know how much to pay in income tax. ... Read Answer >>
  4. How will employer taxes affect my profits?

    I plan to employ 2 workers. I understand that I have to match FUTA and SUTA as well as pay unemployment and disability. Will ... Read Answer >>
  5. Do I need to pay self-employment taxes?

    I've always been under the assumption that "legally" my labor is private property. My income is not actually profit, but ... Read Answer >>
  6. I am retiree, drawing from my 403(b) annuity. I am the sole employee of my own business. ...

    It depends. If your business is unincorporated, and you have net earnings from self-employment, you are eligible to establish ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center