|Tax Topic #554
||2008 Tax Year
Topic 554 - Self-Employment Tax
You are self-employed for this purpose if you are a sole proprietor, an
independent contractor, a partner in a partnership, a member of a single-member
LLC or are otherwise in business for yourself. You usually must pay self-employment
tax if you had net earnings from self-employment of $400 or more. Generally,
the amount subject to self-employment taxes is 92.35% of your net earnings
from self-employment. Net earnings are calculated by subtracting ordinary
and necessary trade or business expenses from the gross income you derived
from your trade or business. You can be liable for paying self-employment
tax even if you are currently receiving social security benefits.
If you had a small profit or net loss from your business but want to receive
credit toward your social security coverage you may be eligible to use one
of the two optional methods to compute your net earnings from self-employment.
Refer to the Form 1040, Schedule SE Instructions to
see if you qualify to use an optional method. An optional method may increase
your earned income credit or the child and dependent care credit.
The self-employment tax rate is a percentage set by law of your net earnings
from self–employment. This rate consists of 6.2% for Social Security
and 1.45% for Medicare. The maximum amount of net earnings subject to the
social security tax is set by law and changes annually. All of your net earnings
are subject to the Medicare tax. Self-employment tax is computed on Form 1040, Schedule SE (PDF). When figuring your adjusted
gross income on Form 1040, you can deduct one–half of your self–employment
tax. This deduction is figured on Form 1040 Schedule SE. The Social Security
Administration uses the information from Schedule SE to figure your benefits
under the social security program.
If you are an employee of a church or qualified church-controlled organization
that elected exemption from social security and Medicare taxes, and you are
not yourself exempt from self-employment tax, you must pay self-employment
tax if you are paid more than $108.28 in a year from the church or qualified
church-controlled organization. If you are required to pay self–employment
tax, you must file Form 1040 and attach Schedule SE. For more information
on church related income and self–employment taxes, refer to Publication 517, Social Security and Other Information for Members of the Clergy
and Religious Workers.
More information on self–employment tax can be found in Publication 334, Tax Guide for Small Business.
Page Last Reviewed or Updated: December 22, 2008
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