3.
Self-Employment Tax
Topics - This chapter discusses:
Useful Items - You may want to see:
Form (and Instructions)
-
Form 1040-PR
Planilla para la Declaración de la Contribución Federal sobre el Trabajo por Cuenta Propia
-
Form 1040-SS
U.S. Self-Employment Tax Return
-
Form 4361
Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science
Practitioners
-
Schedule SE (Form 1040)
Self-Employment Tax
See chapter 7 for information about getting these publications and forms.
Who Must Pay Self-Employment Tax?
If you are a self-employed U.S. citizen or resident, the rules for paying self-employment tax are generally the same whether
you are living in the
United States or abroad.
The self-employment tax is a social security and Medicare tax on net earnings from self-
employment. You must pay self-employment tax if your net earnings from self-employment are at least $400.
For 2005, the maximum amount of net earnings from self-employment that is subject to the social security portion of the tax
is $90,000. All net
earnings are subject to the Medicare portion of the tax.
Employed by a U.S. Church
If you were employed by a U.S. church or a qualified church-controlled organization that chose exemption from social security
and Medicare taxes
and you received wages of $108.28 or more from the organization, the amounts paid to you are subject to self-employment tax.
However, you can choose
to be exempt from social security and Medicare taxes if you are a member of a recognized religious sect. See Publication 517
for more information
about church employees and self-employment tax.
You must take all of your self-employment income into account in figuring your net earnings from self-employment, even income
that is exempt from
income tax because of the foreign earned income exclusion.
Example.
You are in business abroad as a consultant and qualify for the foreign earned income exclusion. Your foreign earned income
is $95,000, your
business deductions total $27,000, and your net profit is $68,000. You must pay self-employment tax on all of your net profit,
including the amount
you can exclude from income.
If you are a member of the clergy, you are treated as self-employed for self-employment tax purposes. Your U.S. self-employment
tax is based upon
net earnings from self-employment figured without regard to the foreign earned income exclusion or the foreign housing exclusion.
You can receive exemption from coverage for your ministerial duties if you conscientiously oppose public insurance due to
religious reasons or if
you oppose it due to the religious principles of your denomination. You must file Form 4361
to apply for this exemption.
This subject is discussed in further detail in Publication 517.
Income From U.S. Possessions
If you are a U.S. citizen or resident and you own and operate a business in Puerto Rico, Guam, the Commonwealth of the Northern
Mariana Islands,
American Samoa, or the Virgin Islands, you must pay tax on your net earnings from self-employment (if they are $400 or more)
from those sources. You
must pay the self-employment tax whether or not the income is exempt from U.S. income taxes (or whether or not you must otherwise
file a U.S. income
tax return). Unless your situation is described below, attach Schedule SE (Form 1040) to your U.S. income tax return.
If you do not have to file Form 1040 with the United States and you are a resident of any of the U.S. possessions listed in
the preceding
paragraph, figure your self-employment tax on Form 1040-SS. Residents of Puerto Rico may file the Spanish-language Form 1040-PR.
You must file these forms with the Internal Revenue Service Center, Philadelphia, PA 19255-0215.
Exemption From Social Security and Medicare Taxes
The United States may reach agreements with foreign countries to eliminate dual coverage and dual contributions (taxes) to
social security systems
for the same work. See Binational Social Security (Totalization) Agreements in chapter 2 under Social Security and Medicare Taxes.
As a general rule, self-employed persons who are subject to dual taxation will only be covered by the social security system
of the country
where they reside. For more information on how any specific agreement affects self-employed persons, contact the United States
Social Security
Administration, as discussed under Binational Social Security (Totalization) Agreements in chapter 2.
If your self-employment earnings should be exempt from foreign social security tax and subject only to U.S. self-employment
tax, you should request
a certificate of coverage from the U.S. Social Security Administration, Office of International Operations. The certificate
will establish your
exemption from the foreign social security tax.
Send the request to the:
U.S. Social Security Administration
Office of International Operations
P.O. Box 17775
Baltimore, MD 21235-7775
