Everyone has to pay Social Security and Medicare taxes. If you work for someone else, you will pay half of the taxes and your employer will pay the other half.
Self-employed business owners aren't so fortunate. They don't have an employer to contribute half of the taxes, so self-employed persons must pay the full amount themselves. The amount is determined by calculations on Schedule SE and reported to the IRS.
If you're self-employed, you'll need to file tax forms for a Schedule SE and a Schedule C together with a Form 1040 when you file your annual tax return with the IRS. Here's what you need to know.
How Much are Social Security and Medicare Taxes?
Social Security taxes for self-employed persons are 12.4 percent of net earnings. Medicare taxes add another 2.9 percent, for a total of 15.3 percent.
For the 2020 tax year, the maximum income subject to Social Security taxes has been increased to $137,700 from $132,900 in 2019. The maximum amount you could pay in Social Security taxes is $17,074.80 at the rate of 12.4 percent.
Medicare taxes do not have a wage base limit. Earners with incomes above $200,000 for a single filer or $250,000 for joint filers are subject to a 0.9 percent additional Medicare tax.
Schedule SE is used to calculate your self-employment taxes for Social Security and Medicare.
Who Needs to File a Schedule SE?
Any self-employed owner who makes more than $400 in net profit from their business must file a Schedule SE.
- Sole Proprietors and single-member limited liability companies whose owners file a Schedule C with their tax returns
- S Corporation owners who file K-1s for their income portion of an S Corp.
- Partners in multi-member LLCs and partnerships who file K-1s with their tax returns for their share of partnership income.
If you run two or more businesses, you can combine the net earnings from all of these businesses into one Schedule SE to calculate your self-employment income. A loss in one business will reduce the income from another and reduce the amount of your self-employment taxes.
How to Complete a Schedule SE
Start with your Schedule C to calculate the profits from your independent business. Schedule C will show your income and all of your business-related tax deductions and how much money you earned. The profit from this schedule will be entered on Schedule SE that has been redesigned for 2020.
According to the 2020 draft form, enter the business profit you calculated from Schedule C on Line 2 of Schedule SE. Be sure to check the IRS site closer to tax time for the exact form and instructions for the 2020 Schedule SE.
Multiply this profit figure by 92.35 percent and enter on Line 4a.
If you do not have other church income and are not using the optional methods to calculate self-employment taxes, multiply Line 4a by 12.4 percent to get your Social Security tax.
Multiply Line 4a by 2.9 percent to get your Medicare tax.
Add both figures together to find your total self-employment tax and enter on Line 4 of Schedule 2, Additional Taxes, on Form 1040.
Take one-half of your total self-employment tax and enter as an Adjustment to Income on Schedule 1 of Form 1040. You at least get some credit for paying the employer’s share of your self-employment tax.
If your business had a loss or only made a slight profit, check the two optional methods that Schedule SE offers to calculate your net earnings.
How to Pay Estimated Taxes if Self-Employed
As a general rule, the IRS says that if a taxpayer expects to owe more than $1,000 in taxes for the year on their self-employment earnings, they should make quarterly estimated payments.
Because taxes are accrued over a year, you should make quarterly estimated payments for both your business income and self-employment taxes to avoid late payment penalties if you are self-employed.
- Internal Revenue Service: Instructions for Schedule SE
- Nerdwallet: Self-Employment Tax: Understand & Calculate It in 2020
- thebalance: How to File Schedule SE for Self-Employment Tax
- Internal Revenue Service: 2020 Schedule SE
- Intuit TurboTax: The Self-Employment Tax
- Internal Revenue Service: Form 1040-ESEstimated Tax for Individuals
- Internal Revenue Service: Schedule 1 Additional Income and Adjustments to Income
- Internal Revenue Service: Schedule 2 Additional Taxes
- Internal Revenue Service. "Self-Employment Tax (Social Security and Medicare Taxes)." Accessed Jan. 28, 2020.
- Internal Revenue Service. "About Schedule SE (Form 1040), Self-Employment Tax." Accessed Jan. 28, 2020.
- Internal Revenue Service. "Who Is Self-Employed?" Accessed Jan. 28, 2020.
- Internal Revenue Service. "Topic No. 751 Social Security and Medicare Withholding Rates." Accessed March 14, 2020.
- Internal Revenue Service. "Questions and Answers for the Additional Medicare Tax." Accessed Jan. 28, 2020.
- Internal Revenue Service. "Topic No. 554 Self-Employment Tax." Accessed March 14, 2020.
- U.S. Senate Committee on Finance. "DIVISION A – KEEPING WORKERS PAID AND EMPLOYED, HEALTH CARE SYSTEM ENHANCEMENTS, AND ECONOMIC STABILIZATION: Section 2302. Delay of payment of employer payroll taxes." Accessed March 30, 2020.
James Woodruff has been a management consultant to more than 1,000 small businesses. As a senior management consultant and owner, he used his technical expertise to conduct an analysis of a company's operational, financial and business management issues. James has been writing business and finance related topics for work.chron, bizfluent.com, smallbusiness.chron.com and e-commerce websites since 2007. He graduated from Georgia Tech with a Bachelor of Mechanical Engineering and received an MBA from Columbia University.