Self-Employed Contributions Act (SECA) Tax

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.

Key Takeaways

  • 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.
  • The total self-employed tax is 15.3%, which includes 12.4% of Social Security tax and 2.9% of Medicare tax.
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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. For 2021, the Social Security tax is only applied to the first $142,800 of earnings. In 2022, the tax will be applied to the first $147,000 of earnings. Any income above that level is not subject to Social Security tax.

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.

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%.

High-income earners face an additional SECA levy. As a result of the Affordable Care Act (ACA), individuals with a 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.

How Much Tax Do You Pay If You Are Self-Employed?

The total tax you pay if you are self-employed is 15.3%. This is made up of Social Security tax (12.4%; both from the employer and employee's side of 6.2% each) and Medicare tax (2.9%; both from the employer and employee's side of 1.45% each).

How Do I Avoid Paying Taxes If I am Self-Employed?

If you are self-employed you cannot avoid paying taxes; that is considered tax evasion. You can reduce the amount of taxes you pay by making tax deductions to reduce your earnings, thereby reducing your total tax bill. The IRS allows self-employed people to make many tax deductions for their business, such as on office supplies, office equipment, gasoline costs, utilities, and insurance.

Are You Taxed More If You Are Self-Employed?

Technically, yes, you are taxed more. On top of paying regular federal and state taxes, a self-employed individual has to pay a 15.3% tax for Social Security and Medicare. The Social Security component is 12.4%, made up of the employer's tax of 6.2% and the employee's tax of 6.2%. The Medicare tax component is 2.9%, made up of the employer's tax of 1.45% and the employee's tax of 1.45%. If you are self-employed, you have to cover the employer's portion as well, hence being taxed more if you are self-employed. The IRS allows a tax deduction on the employer's portion of the tax.

Article Sources
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  1. Social Security Administration. "What Are FICA and SECA Taxes?"

  2. Internal Revenue Service. "Topic No. 751 Social Security and Medicare Withholding Rates."

  3. Internal Revenue Service. "Self-Employment Tax (Social Security and Medicare Taxes)."

  4. Social Security Administration. “2022 Social Security Changes.”

  5. Taxes for Expats. "U.S. International Social Security Agreements: Self Employment Rules."

  6. Social Security Administration. "If You Are Self-Employed," Page 1.

  7. Internal Revenue Service. "Elective FICA Exemption - Churches and Church-Controlled Organizations."

  8. Internal Revenue Service. "Self-Employed Individuals Tax Center."

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