Self-Employment Taxes

Self-Employment tax (SE tax) applies to people who work for themselves. It is in addition to income tax and covers Social Security and Medicare tax. The Social Security Administration uses the information from your tax returns to figure your benefits, allowing you to be covered under the social security system.

You must pay SE tax and file IRS Form 1040 (Schedule SE), Self-Employment Tax if either of the following applies:

  • Your net earnings from self-employment were $400 or more.
  • You had church employee income of $108.28 or more.

Though the self-employment tax is in addition to your income tax, you can deduct one-half of your SE tax as an adjustment to income on the front of your return.

What does it mean to be self-employed?

Any activity you perform to make a profit is considered a business (or trade). The business can be:

  • Full-time
  • Part-time
  • In addition to your regular job (For example: You’re a full-time employee working for someone else and you fix lawnmowers on weekends. You have your own shop, equipment, tools, and advertise your services. You’re self-employed as the owner of the part-time repair shop.)

You can be:

If you have self-employment income, you may be required to pay your taxes quarterly. See How does this affect me?, below.

Determine your net income (profit)

Once you determine you’re self-employed and had income, you need to determine your net profit from the business. This is calculated by taking all your businesses revenue and subtracting any costs or losses. Some businesses have a profit and loss statement that they generate throughout the year.

Generally, if your business(es) had a net loss for the year, you are not subject to SE tax. 

Calculate your SE Tax

Once you determine the net profit from all your businesses, you’re ready to compute your SE tax, using IRS Schedule SE, (IRS Form 1040) Self-Employment Tax. The form will walk you through the calculation for the SE tax, since different lines are used for different types of income. The schedule also helps you calculate the deduction you’ll take for the one-half of the SE tax. This goes on the front of your IRS Form 1040 tax return in the “adjustments” section. Finally, send the Schedule SE to the IRS with your return.

The IRS instructions for the Schedule SE are a good source for understanding a number of special rules.

If you believe you have been incorrectly classified as an independent contractor, you can file a form with the IRS to correct this.

Quarterly Taxes

If you’re subject to self-employment tax and income tax, you’re generally required to file an annual return and pay estimated tax quarterly. It is important to look at your business profit and loss during the year to find out if you need to make estimated payments. If it looks like you’ll be paying SE tax, you’ll likely need to make the payments. You could be subject to a penalty if you don’t have enough withholding or estimated payments on your account.

Social Security

It is very important that you report all of your self-employment income properly and pay the SE tax. The Social Security Administration (SSA) uses this information to calculate your benefits. If the information is not correct, it could reduce your benefits.

SSA will only give you credit for self-employment income reported on a tax return within three years, three months and 15 days after the taxable year you earned the income. If you report a change after the time limit, SSA may change its records, but only to remove or reduce the amount.

Have a different tax issue?  Browse common issues and situations at Get Help.

Is your tax problem more complex?  If your issue is causing you financial hardship, you have tried repeatedly and aren't receiving a response from the IRS, or you feel your taxpayer rights are being violated, consider contacting Taxpayer Advocate Service (TAS).

Do you feel that you need help from a tax professional but can’t afford one? You may be eligible for representation from an attorney, certified public accountant (CPA), or enrolled agent associated with a Low Income Taxpayer Clinic.

Last modified June 21, 2017