Self-employment (SE) tax applies to people who work for themselves. It is in addition to income tax and covers Social Security and Medicare tax. The Social Security Administration (SSA) uses the information from your tax returns to figure your benefits, allowing you to be covered under the social security system.
You must pay SE tax and file IRS Form 1040 (Schedule SE), Self-Employment Tax, if either of the following applies:
Though the self-employment tax is in addition to your income tax, you can deduct one-half (50 percent) of your SE tax as an adjustment to income on the front of your tax return. For tax years after 2017 you will also need to report the amount on Form 1040 Schedule 1, Part II.
What does it mean to be self-employed?
Any activity you perform to make a profit is considered a business (or trade). The business can be:
In addition to your regular job (For example: You’re a full-time employee working for someone else and you fix lawnmowers on weekends. You have your own shop, equipment, tools, and advertise your services. You’re self-employed as the owner of the part-time repair shop.)
You can be:
- The owner or sole proprietor of the business,
- A member of a partnership, or
- An independent contractor.
If you have self-employment income, you may be required to pay your taxes quarterly. See the How does this affect me? section, below.
Once you determine you’re self-employed and had income, you need to determine your net profit from the business. This is done by taking all your businesses income and subtracting any expenses or losses. Some businesses have a profit and loss statement that they generate throughout the year.
Generally, if your business(es) had a net loss (your expenses are more than your income) for the year, you aren’t subject to self-employment (SE) tax.
Once you determine the net profit from all your businesses, you’re ready to compute your SE tax, using IRS Schedule SE, (IRS Form 1040) Self-Employment Tax. The form will walk you through the calculation for the SE tax, since different lines are used for different types of income. The schedule also helps you calculate the deduction you’ll take for the one-half of the SE tax. This goes on the front of your IRS Form 1040 tax return in the “adjustments” section. For tax years after 2017 you will also need to report the amount on Form 1040 Schedule 1, part II. Finally, send the Schedule SE to the IRS with your return.
The IRS instructions for the Schedule SE are a good source for understanding the special rules.
If you believe you’ve been incorrectly classified as an independent contractor, you can file a form with the IRS to correct this.
If you’re subject to SE tax and income tax, you’re generally required to file an annual return and pay estimated tax quarterly. It is important to look at your business profit and loss during the year to find out if you need to make estimated payments. If it looks like you’ll be paying SE tax, you’ll likely need to make the payments. You could be subject to a penalty if you don’t have enough withholding or estimated payments on your account.
It is very important for you report all your self-employment income properly and pay the SE tax. The SSA uses this information to calculate your benefits. If the information is not correct, it could reduce your benefits. Information on how credits are determined by SSA can be obtained at the SSA website: www.ssa.gov
SSA will only give you credit for self-employment income reported on a tax return within three years, three months and 15 days after the taxable year you earned the income. If you report a change after the time limit, SSA may change its records, but only to remove or reduce the amount.
The Taxpayer Advocate Service is an independent organization within the IRS that helps taxpayers and protects taxpayers’ rights. We can offer you help if your tax problem is causing a financial difficulty, you’ve tried and been unable to resolve your issue with the IRS, or you believe an IRS system, process, or procedure just isn’t working as it should. If you qualify for our assistance, which is always free, we will do everything possible to help you.
Visit www.taxpayeradvocate.irs.gov or call 1-877-777-4778.
Low Income Taxpayer Clinics (LITCs) are independent from the IRS and TAS. LITCs represent individuals whose income is below a certain level and who need to resolve tax problems with the IRS. LITCs can represent taxpayers in audits, appeals, and tax collection disputes before the IRS and in court. In addition, LITCs can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. Services are offered for free or a small fee. For more information or to find an LITC near you, see the LITC page on the TAS website or Publication 4134, Low Income Taxpayer Clinic List.
The taxpayer Bill of Rights is grouped into 10 easy to understand categories outlining the taxpayer rights and protections embedded in the tax code.
It is also what guides the advocacy work we do for taxpayers.
