DEFINITION of 'Self Employed Contributions Act Tax - SECA Tax'

The Self-Employed Contributions Act (SECA) tax is a form of taxes that self-employed business owners must pay based on their net earnings from self-employment. Self Employed Contributions Act Tax (SECA Tax) was first imposed by the SEC Act of 1954.

SECA tax is also called self-employment tax.

BREAKING DOWN 'Self Employed Contributions Act Tax - SECA Tax'

The Self-Employment Contributions Act (SECA) of 1954 is a tax law that requires self-employed persons or owners of small businesses to pay both the employer and employee portions of the Federal Insurance Contributions Act (FICA) tax that funds Social Security and Medicare. The basic tax rate for SECA tax payments is twice the percentage rate that employees pay at source from their paychecks in order to cover both the employer and employee portion of the payment. SECA taxes are computed on the basis of net earnings, defined as the gross income derived from business activities, less the expenses incurred in the course of doing business.

Social Security tax is assessed at a rate of 6.2% for an employer and 6.2% for the employee. A business owner subject to SECA will be taxed 6.2% + 6.2% = 12.4%, as s/he is considered to be both an employer and an employee. The Social Security tax is only applied to the first $128,400 of self-employment income earned, for a maximum tax of $15,921.60 (as of 2018).

The Medicare tax rate is 2.9% (1.45% for employer plus 1.45% for employee). Total SECA tax is, therefore, 12.4% + 2.9% = 15.3%. So, a self-employed person having net income of exactly $128,400 in 2018 would have to remit FICA taxes of $19,645.20 = $128,400 X 0.153. Earnings above $200,000 ($250,000 for married couples filing jointly) are subject to an additional 0.9% Medicare tax. In effect, while the Social Security component of the SECA tax phases out once net income reaches the low six figures, all net income is subject to the Medicare tax.

SECA tax is a tax-deductible expense. The employer portion of the payment is deductible as a business expense. In other words, the IRS allows self-employed individuals to use the employer half of the self-employment tax, or 7.65% (calculated as half of 15.3%), as a business deduction for purposes of calculating the tax.

Individuals typically pay SECA tax on 92.35% of their net earnings, not 100%. Still, it represents a significant cost of being self-employed. Taxpayers who are self-employed aren't subject to withholding tax, hence, the IRS requires taxpayers to make quarterly estimated tax payments in order to cover their self-employment tax obligation. If a small business owner's net earnings is less than $400, no SECA Tax is payable. If, however, his or her net earnings is above this set minimum, s/he must pay SECA Tax on the entire amount (including the amount under the minimum).

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