What is self-employment tax and who is subject to Self-Employment Tax?
What is Self-Employment Tax?
Self-employment tax consists of two separate taxes: Social Security Tax (OASDI) and Medicare tax.
Employees who receive a W-2 Tax Form have these taxes withheld from their paycheck.
Self-employed individuals do not, and are thus required to pay these taxes themselves.
Who Is Subject To Self-Employment Tax?
1-Sole proprietors who file a Schedule C/Form 1040 and (independent contractors who receive Tax Form 1099-Misc Income)
2-General partners in partnerships on their allocable ordinary net income from the partnership (Note it is GENERAL Partners)--- LIMITED Partners are deemed as passive investors in the partnership, do not participate in managing or operating the business and thus are not subject to self-employment UNLESS the limited partner received guaranteed payments for services rendered to the partnership which would be rare.
3-Members (Owners) in limited liability companies (operated as a partnership and or disregared entity)
4-Guaranteed Payments to partners and limited liability company members filing a partnership tax return.
NOTE Partnerships and Corporations themselves do not pay self-employment taxes since self-employment tax is imposed on the individual and not the entity itself.
NOTE: Rental Real Estate is not subject to self-employment tax.
NOTE: If you own (are a shareholder) of a Regular C Corporation or S Corporation, the IRS considers you to be an employee of your corporation, and you must take reasonable compensation for your services. You cannot avoid this by taking large owner distributions and avoiding payroll taxes. This is a high audit area for the IRS.
SUMMARY SUBJECT TO SELF EMPLOYMENT TAX
1-Sole Proprietors and Independent Contractors who operate a trade or business and file Schedule C, Form 1040
2-General partners on their allocable share of net ordinary income on box #1 Schedule K-1 Form 1065.
3-Guaranteed payments made to general and limited partners for services rendered
4-Single Member LLC's operating as a disregarded entity.
5-Husband and Wife operating as a Qualified Joint Venture by election since each file their own Schedule C, Form 1040.
SUMMARY WHO IS NOT SUBJECT TO SELF EMPLOYMENT TAX?
1-Limited Partners allocable net income if they are strictly a limited partner.
2-Both C and S Corporation Shareholders since they are deemed an employee of their corporation and SHOULD receive a Form W-2.
3-Rental Real Estate owners
What is Self-Employment Tax Based On?
You pay self-employment taxes on your NET self-employment income from your business or businesses (your net profit after deducting you business expenses), not your gross or entire income. The Social Security portion has a maximum threshold adjusted each year while the Medicare Portion does not.
If you receive wages and self-employment income during the year, the Self-Employment Tax base is reduced by the wages on which Social Security and Medicare were already paid.
Also, no self-employment tax is due if NET Self-Employment Income is LESS THAN $400.
The tax rates are 12.4% for Social Security and 2.9% for Medicare for a total tax of 15.3%.
Paying and Reporting Self-Employment Taxes
You must pay self-employment taxes directly to the IRS during the year as part of your quarterly estimated income tax payments. Quarterly estimated inocme tax payments are due on the 15th day of April, June, September (of the current tax year), and (January 15th of the following tax year).
Failing to make timely and appropriate payments can result in additional taxes and IRS penalties and interest charges.
When you file your annual tax return, you must include IRS Form SE, Self-Employment Tax, along with your income tax return.
You may also claim 50% of your self-employment tax as an adjustment on your Form 1040. This adjustment is available whether or not your itemize deductions.
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