What Is the Self-Employed Contributions Act (SECA) Tax?
The Self-Employed Contributions Act (SECA) tax is a levy from the U.S. government on those who work for themselves, rather than for an outside company. It requires self-employed workers to contribute tax equivalent to both the employer and employee portions of the Federal Insurance Contributions Act (FICA) tax, which funds Social Security and Medicare.
- SECA requires self-employed individuals to pay into the Social Security and Medicare tax funds.
- As self-employed individuals are their own employers, they are permitted to deduct the employer-portion of SECA taxes as a business expense.
- Net self-employment earnings of less than $400 do not incur a SECA tax.
WATCH: 8 Tax Benefits For The Self-Employed
Understanding the Self-Employed Contributions Act (SECA) Tax
SECA taxes are computed on the basis of net earnings, defined as the gross income derived from business activities, minus the expenses incurred in the course of doing business.
Social Security tax is assessed at a basic rate of 6.2% for an employer and 6.2% for the employee. Self-employed taxpayers subject to SECA are taxed at 12.4% (6.2% + 6.2%), as they are considered to be both employer and employee.
There are limits, however, on how much income is subject to this percentage. The Social Security tax is only applied to the first $137,700 of net income, for a maximum tax of $17,075 in tax year 2020. (In 2021, the tax will be applied to the first $142,800 of net income, for a maximum tax of $17,707.) Any income above that level is not subject to Social Security tax.
The Medicare tax rate is 2.9% (1.45% for employers plus 1.45% for employees), and there is no exemption above a certain income. Total SECA tax is, therefore, 15.3%. A self-employed person who has a net income of exactly $137,700 in 2020 would have to remit SECA taxes of 15.3% of their income (12.4% + 2.9%), which comes to $21,068 (in 2021, 15.3% of net income of $142,800 would be $21,848 in SECA taxes).
Unless there is a specific agreement in place between countries, expatriates (Americans who live and work abroad) are still expected to pay SECA taxes on earnings that are gained in the process of being self-employed.
High-income earners face an additional SECA levy. As a result of the Affordable Care Act (ACA), individuals with net income above $200,000 ($250,000 for married couples filing jointly) will be subject to an additional 0.9% Medicare tax.
Deducting the Self-Employed Contributions Act (SECA) Tax
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 as a business deduction for purposes of calculating the taxpayer's income tax. This takes into account that the efforts of running a company are taken on by an individual, rather than an "employer," which would be the case for an employee of a company.
It is important to note that self-employment taxes refer to Social Security and Medicare taxes, similar to FICA taxes paid by an employer. When a taxpayer takes a deduction of one-half of the SECA tax, it is only a deduction for the calculation of that taxpayer's income tax. It does not reduce the net earnings from self-employment or reduce the self-employment tax itself.
Paying the Self-Employed Contributions Act (SECA) Tax
Since taxpayers who are self-employed aren't subject to withholding tax, the IRS requires SECA tax to be included in quarterly estimated payments of income taxes. If self-employed net earnings are less than $400 (or $108.28 from a church or other qualified church-controlled organization exempt from employer Social Security and Medicare taxes), no SECA tax is due, and it is not required to be listed on a tax return. However, if self-employed net earnings are above this minimum, SECA tax must be paid on the entire amount, including the amount under the minimum.