TaxTalk: Self Employment Tax - General Overview
The self employment (SE) tax is a Social
Security and Medicare tax on individuals who work for themselves. It is
comparable to the Social Security and Medicare taxes withheld from the pay
of employees from wages and amounts paid by employers on their employees.
Tax rates and maximum net earnings for
self-employment taxes
The self-employment tax rate on net
earnings for 2005 and 2004 is 15.3 percent, which is the sum of 12.4
percent for social security (old-age, survivors, and disability
insurance), and 2.9 percent for Medicare (hospital insurance).
The maximum amount of net income subject to
the social security part (12.4 percent) for 2005 is $90,000 and $87,900
for 2004. All net income is subject to the Medicare part (2.9 percent). To
state it another way, all net earnings up to the limit are taxed at 15.3
percent and all net earnings over the limit are taxed at 2.9 percent.
- If your net
earnings from self-employment were $400 or more, then you were subject to SE Tax.
- You are self-employed if you carry on a
trade or business as a sole proprietor, an independent contractor, a
member of a partnership, or are otherwise in business for yourself.
- You do not have to carry on regular
full-time business activities to be self-employed. Part-time work,
including work you do on the side in addition to your regular job, may
also be self-employment.
A trade or business is generally an
activity carried on for a livelihood or in good faith to make a profit.
The facts and circumstances of each case determine whether or not an
activity is a trade or business. Regularity of activities and transactions
and the production of income are important elements. You do not need to
actually make a profit to be in a trade or business as long as you have a
profit motive. You do need, however, to make ongoing efforts to further
the interests of your business.
The SE tax rules apply even if you are
fully insured under social security or have started receiving benefits.
Statutory employees. If you earned
wages as a statutory employee, the box titled "Statutory
employee" in box 15 of Form W-2, Wage and Tax Statement, will be
checked. You do not pay SE tax on those earnings because social security
and Medicare taxes (FICA taxes) were withheld. Do not file Schedule SE if
you have no other earnings from self-employment. However, you should file
a separate Schedule C (or schedule C-EZ) to report only the income and
expenses related to your earnings as a statutory employee.
More specific self employment tax issues:
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