Self-Employment Tax

Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners.

If you earned income as a statutory employee, you do not pay SE tax on that income.
 

Social security coverage.   Your payments of SE tax contribute to your coverage under the social security system if you are covered. Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits. Social security benefits are available to self-employed persons just as they are to wage earners.

By not reporting all of your self-employment income, you could cause your social security benefits to be lower when you retire.

How to become insured under social security.   You must be insured under the social security system before you begin receiving social security benefits. You are insured if you have the required number of credits (also called quarters of coverage), discussed next.

Earning credits in 2002 and 2003.   For 2002, you received one credit, up to a maximum of four credits, for each $870 ($890 for 2003) of income subject to social security. Therefore, for 2002, if you had income (self-employment and wages) of $3,480 that was subject to social security taxes, you received four credits ($3,480 ÷ $870).

For an explanation of the number of credits you must have to be insured and the benefits available to you and your family under the social security program, consult your nearest Social Security Administration (SSA) office.

Making false statements to get or to increase social security benefits may subject you to penalties.

The Social Security Administration (SSA) time limit for posting self-employment income.   Generally, the SSA will give you credit only for self-employment income reported on a tax return filed within 3 years, 3 months, and 15 days after the tax year you earned the income. If you file your tax return or report a change in your self-employment income after this time limit, the SSA may change its records, but only to remove or reduce the amount. The SSA will not change its records to increase your self-employment income.

Who must pay self-employment tax.   You must pay SE tax and file Schedule SE (Form 1040) if either of the following applies.

1. Your net earnings from self-employment (excluding church employee income) were $400 or more.
2. You had church employee income of $108.28 or more.

The SE tax rules apply even if you are fully insured under social security or have started receiving benefits.

Methods for figuring net earnings.   There are three ways to figure net earnings from self-employment.

• The regular method
• The nonfarm optional method
• The farm optional method

You must use the regular method unless you are eligible to use one or both of the optional methods. Multiply your total earnings subject to SE tax by 92.35% (.9235) to get your net earnings under the regular method.

Why use the optional methods?   You use the optional methods when you have a loss or a small net profit and any one of the following applies.

• You want to receive credit for social security benefit coverage.
• You incurred child or dependent care expenses for which you could claim a credit. (An optional method may increase your earned income, which could increase your credit.)
• You are entitled to the earned income credit. (An optional method may increase your earned income, which could increase your credit.)
• You are entitled to the additional child tax credit. (An optional method may increase your earned income, which could increase your credit.)

SE tax rate.   The SE tax rate on net earnings is 15.3% (12.4% social security tax plus 2.9% Medicare tax).

Maximum earnings subject to SE tax.   Only the first $84,900 of your combined wages, tips, and net earnings in 2002 is subject to any combination of the 12.4% social security part of SE tax, social security tax, or railroad retirement (tier 1) tax.

All your combined wages, tips, and net earnings in 2002 are subject to any combination of the 2.9% Medicare part of SE tax, social security tax, or railroad retirement (tier 1) tax.

If your wages and tips are subject to either social security or railroad retirement (tier 1) tax, or both, and total at least $84,900, do not pay the 12.4% social security part of the SE tax on any of your net earnings. However, you must pay the 2.9% Medicare part of the SE tax on all your net earnings.

Deduct one-half of your SE tax as an adjustment to income on line 29 of Form 1040.
 

More information.   For more information on the SE tax, see Publication 533, Self-Employment Tax.

Table 1-2. Which Forms Must I File?

IF You Are Liable For:	Use Form:	Due By: 1
Income tax	1040 and Schedule C 2 or C-EZ	15th day of 4th month after end of tax year
Self-employment tax	Schedule SE	File with Form 1040.
Estimated tax	1040-ES	15th day of 4th, 6th, and 9th months of tax year, and 15th day of 1st month after the end of tax year
Social security and Medicare taxes and income tax withholding	941	April 30, July 31, October 31, and January 31 4
	8109 (to make deposits) 3	See Publication 15.
Providing information on social security and Medicare taxes and income tax withholding	W-2 (to employee) W-2 and W-3 (to the Social Security Administration)	January 31 4 Last day of February (March 31 if filing electronically) 4
Federal unemployment (FUTA) tax	940 or 940-EZ	January 31 4
	8109 (to make deposits) 3	April 30, July 31, October 31, and January 31, but only if the liability for unpaid tax is more than $100
Filing information returns for payments to nonemployees and transactions with other persons	See Information Returns.	Forms 1099-to the recipient by January 31 and to the IRS by February 28 (March 31 if filing electronically)
		Other forms - See the General Instructions for Forms 1099, 1098, 5498, and W-2G.
Excise tax	See Excise Taxes.	See the instructions to the forms.

1 If a due date falls on a Saturday, Sunday, or legal holiday, the due date is the next business day. For more information, see Publication 509, Tax Calendars for 2003.

2 File a separate schedule for each business.

3 Do not use if you deposit taxes electronically.

4 See the form instructions if you go out of business, change the form of your business, or stop paying wages.

Employment Taxes

If you have employees, you will need to file forms to report employment taxes. Employment taxes include the following items.

• Social security and Medicare taxes.
• Federal income tax withholding.
• Federal unemployment (FUTA) tax.

For more information, see Publication 15, Circular E, Employer's Tax Guide. That publication explains your tax responsibilities as an employer.

To help you determine whether the people working for you are your employees, see Publication 15-A, Employer's Supplemental Tax Guide. That publication has information to help you determine whether an individual is an independent contractor or an employee.

If you incorrectly classify an employee as an independent contractor, you can be held liable for employment taxes for that worker plus a penalty.

An independent contractor is someone who is self-employed. You do not generally have to withhold or pay any taxes on payments to an independent contractor.

Excise Taxes

This section explains the excise taxes you may have to pay and the forms you have to file if you do any of the following.

• Manufacture or sell certain products.
• Operate certain kinds of businesses.
• Use various kinds of equipment, facilities, or products.
• Receive payment for certain services.

For more information on excise taxes, see Publication 510, Excise Taxes for 2003.

Form 720.   The federal excise taxes reported on Form 720, Quarterly Federal Excise Tax Return, consist of several broad categories of taxes, including the following.

• Environmental taxes on the sale or use of ozone-depleting chemicals and imported products containing or manufactured with these chemicals.
• Communications and air transportation taxes.
• Fuel taxes.
• Tax on the first retail sale of heavy trucks, trailers, and tractors.
• Luxury tax on the first retail sale of passenger vehicles.
• Manufacturers taxes on the sale or use of a variety of different articles.

Form 2290.   There is a federal excise tax on the use of certain trucks, truck tractors, and buses on public highways. The tax applies to vehicles having a taxable gross weight of 55,000 pounds or more. Report the tax on Form 2290, Heavy Highway Vehicle Use Tax Return. For more information, see the instructions for Form 2290.

ATF forms.   If you produce, sell, or import guns, tobacco, or alcohol products, or if you manufacture equipment for their production, you may be liable for one or more excise taxes. Report these taxes on forms filed with the Bureau of Alcohol, Tobacco, and Firearms (ATF).

Depositing excise taxes.   If you have to file a quarterly excise tax return on Form 720, you may have to deposit your excise taxes before the return is due. For details on depositing excise taxes, see Publication 510.

Information Returns

If you make or receive payments in your business, you may have to report them to the IRS on information returns. The IRS compares the payments shown on the information returns with each person's income tax return to see if the payments were included in income. You must give a copy of each information return you are required to file to the recipient or payer. In addition to the forms described below, you may have to use other returns to report certain kinds of payments or transactions. For more details on information returns and when you have to file them, see the Instructions for Forms 1099, 1098, 5498, and W-2G.

Form 1099-MISC.   Use Form 1099-MISC, Miscellaneous Income, to report certain payments you make in your business. These payments include the following items.

• Payments of $600 or more for services performed for your business by people not treated as your employees, such as fees to subcontractors, attorneys, accountants, or directors.
• Rent payments of $600 or more, other than rents paid to real estate agents.
• Prizes and awards of $600 or more that are not for services, such as winnings on TV or radio shows.
• Royalty payments of $10 or more.
• Payments to certain crew members by operators of fishing boats.

You also use Form 1099-MISC to report your sales of $5,000 or more of consumer goods to a person for resale anywhere other than in a permanent retail establishment.

Form W-2.   You must file Form W-2, Wage and Tax Statement, to report payments to your employees, such as wages, tips, and other compensation, withheld income, social security, and Medicare taxes, and advance earned income credit payments. For more information on what to report on Form W-2, see the Instructions for Forms W-2 and W-3.

Penalties.   The law provides for the following penalties if you do not file Form 1099-MISC or Form W-2 or do not correctly report the information. For more information, see the General Instructions for Forms 1099, 1098, 5498, and W-2G.

• Failure to file information returns. This penalty applies if you do not file information returns by the due date, if you do not include all required information, or if you report incorrect information.
• Failure to furnish correct payee statements. This penalty applies if you do not furnish a required statement to a payee by the required date, if you do not include all required information, or if you report incorrect information.

Waiver of penalty.   This penalty will not apply if you can show that the failure was due to reasonable cause and not willful neglect.

In addition, there is no penalty for failure to include all the required information, or for including incorrect information, on a de minimis (small) number of information returns if you correct the errors by August 1 of the year the returns are due. (A de minimis number of returns is the greater of 10 or ½ of 1% of the total number of returns you are required to file for the year.)

Form 8300.   You must file Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, if you receive more than $10,000 in cash in one transaction, or two or more related business transactions. Cash includes U.S. and foreign coin and currency. It also includes certain monetary instruments such as cashier's and traveler's checks and money orders. Cash does not include a check drawn on an individual's personal account (personal check). For more information, see Publication 1544, Reporting Cash Payments of Over $10,000 (Received in a Trade or Business).

Penalties.   There are civil and criminal penalties, including up to 5 years in prison, for not filing Form 8300, filing (or causing the filing of) a false or fraudulent Form 8300, or structuring a transaction to evade reporting requirements.

(Note: The following checklists highlight the typical final forms and schedules you may need to file if you ever go out of business. For more information, see the instructions for the listed forms.)

Table 1-3. Going Out of Business Checklists

If you are liable for:	YOU may need to:
Income Tax	file Schedule C or C-EZ with your Form 1040 for the year in which you go out of business.
	file Form 4797 with your Form 1040 for each year in which you sell or exchange property used in your business or in which the business use of certain section 179 or listed property drops to 50% or less.
	file Form 8594 with your Form 1040 if you sold your business.
Self-Employment Tax	file Schedule SE with your Form 1040 for the year in which you go out of business.
Employment Taxes	file Form 941 for the calendar quarter in which you make final wage payments. Note: Do not forget to check the box above line 1, If you do not have to file returns in the future..., and enter the date final wages were paid.
	file Form 940 or 940-EZ for the calendar year in which final wages were paid. Note: Do not forget to check the box, If you will not have to file returns in the future..., under Question C box.
Information Returns	provide Forms W-2 to your employees for the calendar year in which you make final wage payments. Note: These forms are generally due by the due date of your final Form 941.
	file Form W-3 to file Forms W-2. Note: These forms are generally due within 1 month after the due date of your final Form 941.
	provide Forms 1099-MISC to each person to whom you have paid at least $600 for services (including parts and materials) during the calendar year in which you go out of business.
	file Form 1096 to file Forms 1099-MISC.

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