In the United States, small business owners, independent contractors and other individuals who carry on a trade or business for themselves are often subject to self-employment tax. In addition to the self employed, self-employment tax must be paid by certain individuals who do not pay Social Security or Medicare taxes. In general, self-employment tax must be paid by those with $400 or more of eligible income.
General
Self-employment tax is intended to replace the Social Security and Medicare contributions made by employees. Typically, employees pay one-half of these taxes with a matching contributing made by employers. Self-employment tax is equivalent to both the employee and employer portion of these contributions. Self-employment taxes are currently 15.3 percent on self-employment income up to $106,800, and 2.9 percent on all self-employment income above $106,800 earned in 2010.
Net Earnings
For individuals engaging in a trade or business for themselves, the self-employment tax filing threshold is $400 of net earnings. It is important to note that this threshold is calculated on the profits of the self-employed taxpayer after deducting expenses, and not on gross revenues. For example, a self-employed taxpayer with revenues of $2,000 and eligible deductions of $1,800 would have net earnings of $200 and would not need to pay self-employment tax.
Other Payees
In addition to individuals engaging in a trade or business for themselves, the IRS requires that religious ministers and church employees pay self-employment tax, as Social Security and Medicare taxes are not deducted from their wages. For church employees, the minimum wage threshold to pay taxes is $108.28.
In addition, U.S. citizens working abroad with wages of $400 or more must generally pay self-employment tax if it Social Security and Medicare taxes are not paid on their behalf by employers. Typically, however, U.S. citizens paying social security taxes to a foreign government do not need to additionally pay U.S. self-employment tax.
Schedule SE
Taxpayers must report self employment income to the IRS via Schedule SE, Self-Employment Tax. This schedule is filed with Form 1040, U.S. Individual Income Tax Return. Any self-employment tax computed on the form is paid with any individual income taxes calculated on Form 1040. Taxpayers may generally deduct one-half of all self-employment taxes as a reduction to adjusted gross income when calculating individual income tax liability.
