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. Transportation Expenses

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

    A form of taxes that self-employed business owners must pay based ...
  4. Social Security Act

    A law enacted by President Franklin D. Roosevelt in 1935 to create ...
  5. Medicare Wages

    An employee's earnings that are subject to a U.S. payroll tax ...
  6. Taxes

    An involuntary fee levied on corporations or individuals that ...
Related Articles
  1. 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.
  2. Entrepreneurship

    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.
  3. Entrepreneurship

    Starting A Small Business: Taxes

    By Amy Fontinelle When you become a small business owner, you acquire a responsibility for making tax payments that you didn't have as an employee. Although you probably didn't realize it, your ...
  4. Taxes

    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.
  5. 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.
  6. Taxes

    How To Calculate AGI For Tax Purposes

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

    10 Tax Benefits For The Self-Employed

    Running your own business has both personal and financial perks.
  8. Taxes

    7 New Tax Breaks For 2011

    Taxpayers should be aware of these seven new (or improved) breaks, such as a larger earned income credit and tax-free employer-paid parking.
  9. Taxes

    How to File Your Child's First Income Tax Return

    Use this quick parental guide to help your child learn the tax filing process and establish good habits.
  10. Options & Futures

    Self Employed? 5 Steps to Scoring a Mortgage

    Convince lenders that you're a good bet despite your lack of a steady income.
RELATED FAQS
  1. 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 >>
  2. I am working and every paycheck social security & Medicare take their deduction, ...

    I am 71 & collecting my deceased ex-husband’s social security. I feel I'm not getting my full social security ... Read Answer >>
  3. 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 >>
  4. What are the Social Security tax caps?

    Learn how the Social Security tax cap works, what percentage of income is deducted for Social Security taxes and the history ... Read Answer >>
  5. What is the Social Security tax rate?

    Learn what the Social Security tax rate is, how it has evolved over the years, what is future may hold and a common complaint ... Read Answer >>
  6. Will I pay taxes on my Social Security payouts?

    Find out if you're one of the people who has to pay federal income taxes on the Social Security benefit you receive. Read Answer >>
Hot Definitions
  1. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  2. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
Trading Center