What Is the Self Employed Contributions Act Tax (SECA)?
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 to pay both the employer and employee portions of the Federal Insurance Contributions Act (FICA) tax, which funds Social Security and Medicare.
WATCH: 8 Tax Benefits For The Self-Employed
- Self Employed Contributions Act is a tax levy that forces self-employed individuals to pay taxes on their earnings.
- 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.
- Despite allowances given, SECA represents a large financial cost to being self-employed. Quarterly earnings below $400 are not taxable by SECA.
SECA Tax Rates
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 basic rate of 6.2% for an employer and 6.2% for the employee. A business owner subject to SECA, then, will be taxed at 12.4% (6.2% + 6.2%), as he or she is considered to be both an employer and an employee. There are limits, however, on how much income is subject to this percentage. The Social Security tax is only applied to the first $132,900 of net income, for a maximum tax of $16,480 (as of 2019). Any income above that level is not subject to Social Security tax.
The Medicare tax rate is 2.9% (1.45% for employer plus 1.45% for employees), and there is no exemption above a certain income. Total SECA tax is, therefore, 15.3%. So, a self-employed person who has a net income of exactly $132,900 in 2018 would have to remit FICA taxes of 15.3% of their income (12.4% + 2.9%), which comes to $19,935. High-income earners, on the other hand, face an additional SECA levy. Net income above $200,000 ($250,000 for married couples filing jointly) is subject to an additional 0.9% Medicare tax.
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.
Deducting the 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 as a business deduction for purposes of calculating the tax, taking into account that the efforts of running the company are taken on by them, rather than their "employer," which would be the case for employees of companies owned by someone other than themselves. Consequently, after deducting the 7.65% half-portion (from 50% of the 15.3% total SECA tax), individuals who are self-employed typically pay SECA tax on 92.35% of their net earnings, rather than 100%. Despite taking this all into account, the tax still represents a significant cost of being self-employed.
Since taxpayers who are self-employed aren't subject to withholding tax, the IRS requires SECA tax to be included in the quarterly estimated payments of all their income taxes. If self-employed net earnings are less than $400 for the quarter, though, no SECA tax is payable. If income for the quarter is above this set minimum, however, SECA tax must be paid on the entire amount, including the amount under the minimum.