When Do You Pay Self-Employment Tax?

November 7, 2012 | By: TaxCure Staff

self employment tax IRSWhen you’re self-employed, taxes are a different ballgame than for those employed by others. Not only do you have to make sure that you pay your taxes regularly – they aren’t automatically held from your paycheck – but you also have to pay the self-employment tax.

Your self-employment tax is paid on top of your income tax. When you are employed by someone else, the amount you owe for Medicare and Social Security taxes is withheld automatically. On top of that, your employer actually covers a portion of your taxes.

As a self-employed person, the story is different. You are responsible for both the employee and the employer portions of Medicare and Social Security taxes. This is what is known as self-employment tax.

Who Has to Pay SE Tax?

Any time your earnings from self-employed activities (all of them combined together) amount to $400 or more in a tax year, you are required to pay self-employment tax. It’s important to understand the following about reporting your income, and paying self-employment tax:

You pay this tax no matter your age.
Even if you are collecting Social Security or Medicare, you are still supposed to pay.
If you learn less than $400 in self-employment income during the tax year, it should still be reported on your Form 1040, even though you won’t have to pay SE tax on it.
Don’t rely entirely on 1099 Forms. Clients don’t have to send you a 1099 unless they pay you $600 or more during the year. However, you should still keep track of your income from various sources on your own, and report it as self-employment income.

Members of the clergy should note that church employee income of $108.28 or more is subject to the SE tax.

Reporting Your SE Tax to the IRS

Your self-employment tax is reported on your Form 1040. First, though, you need to figure out your net earnings from your self-employed activities. You can use a Schedule C (sole proprietorship and some types of LLC), or you can use your business tax return (S-Corp. and other types of LLC) to determine your earnings.

Once you know your net earnings from self-employment, you can fill out the Schedule SE to determine the amount you owe for this type of tax. Depending on how you are incorporated, and what business expenses you can claim, you can reduce your tax liability by reducing your net earnings. Just make sure that you consult with a knowledgeable tax professional ahead of time, and avoid using illegal tactics to reduce your income.

SE tax also provides you with a tax deduction. You receive an above the line deduction on Form 1040, amounting to half the amount of your self-employment tax. It’s not the same as receiving a tax credit, but it can still help offset some of the effects of paying the self-employment tax.

Also, remember that the Social Security portion might not be paid on your entire self-employed income. Social Security taxes are only paid on portion of your income. In 2013, you will pay Social Security taxes on the first $113,700 of income.

If you are working for yourself, don’t forget to plan for the SE tax. Chances are it will affect your final tax bill.