You usually must pay self–employment tax if you had net earnings
from self–employment of more than an amount specified by law. Generally,
net earnings from self–employment represent 92.35% of your net profit.
Net profit is calculated by subtracting ordinary and necessary trade or business
expenses from your gross self-employment income. You are self–employed
for this purpose if you are a sole proprietor, an independent contractor,
a member of a partnership, or are otherwise in business for yourself. 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 pay
into the social security system, 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 total self-employment tax rate is a percentage set by law of your net
earnings from self–employment. This rate is the total of a percentage
for Social Security and a percentage for Medicare. There is a maximum amount
of net earnings subject to the social security tax that is set by law. 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 an amount specified by law 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.
