Building Your Business Business Taxes Social Security and Medicare Tax for the Self-Employed How Self-Employment Taxes are Calculated and Paid By Jean Murray Updated on April 29, 2020 In This Article View All In This Article What "Self-Employed" Means The Self-Employment Tax Rate Income for Self-Employment Tax How SECA Tax is Calculated SECA Tax vs. FICA Tax SECA Tax and Employment Earnings Paying Less Self-Employment Tax Photo: Hero Images / Getty Images Everyone who works in the U.S. must pay taxes to fund Social Security and Medicare. For self-employed individuals, this is called Self-Employment Tax, sometimes called SECA Tax. It's similar to FICA taxes (Social Security and Medicare taxes paid by employees and employers). How Do I Know If I'm Self-Employed? You are self-employed for self-employment tax purposes, according to the IRS, if you: Carry on a trade or business, including being a sole proprietor or independent contractor, You are a partner in a partnership, or You are otherwise in business for yourself, even if it's part-time. You are also self-employed if you are a member (owner) of a limited liability company (LLC). But you aren't considered self-employed if you are a shareholder of a corporation or S corporation. What Is the Self-Employment Tax Rate? For self-employment income earned in a particular year, the self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance). Note Schedule SE is used to calculate your self-employment tax liability for your tax return. This calculation includes a deduction of half the amount of tax from your adjusted gross income. This deduction reduces your self-employment tax liability, but it doesn't change the amount for benefit calculations. Social Security Tax. The Social Security portion is capped at a maximum amount, which changes each year. If your net earnings exceed the maximum that that year, you continue to pay only the Medicare portion of the SECA tax. Additional Medicare Tax. There is also an additional Medicare tax of 0.9% for higher-income individuals. This rate begins at a set threshold amount each year. What is My Income for Self-Employment Tax? Business owners pay income taxes on their business income in different ways. The business income for self-employment tax purposes depends on the type of business: The taxable income of a self-employed owner of a sole proprietorship or single-member LLC is the net income (profits) of the business, as calculated on Schedule C of the owner's personal tax return. The taxable income of a partner in a partnership, a member of a multiple-member LLC is based on their share of the company's income. How Is SECA Tax Calculated for Income Tax Purposes? The amount of SECA tax is calculated and included in the owner's personal tax return in several steps: Step 1: The business owner's taxable income is calculated, depending on the type of business owned, as described above. Step 2: This income is used to calculate self-employment tax by using Schedule SE. Step 3: Half of the calculated amount of the self-employment tax is deducted from the individual's taxable income on page 1 of the 1040 form. Step 4: The rest of the self-employment tax is included in the calculation of taxes owed by the individual. Note Like income taxes, self-employment tax isn't withheld from your payments as a business owner, so you may need to pay quarterly estimated taxes. Don't forget to include your estimated liability for self-employment taxes when you calculate your estimated tax payments. What's the Difference Between SECA Tax and FICA Tax? Employees who work in the U.S. pay Social Security and Medicare tax as required by the Federal Insurance Contributions Act (FICA). Here's a table that details the differences: SECA Tax vs. FICA Tax FICA Tax SECA Tax Who Pays Employee and employer/ each pays half Self-employed person pays total* Based on Employee wages/salary Net income of business or partner share of net income How Paid Employee withholding/ Employer payments With tax return How reported/ calculated Employee on Form W-2, Employer on quarterly tax report (Form 941) Using Schedule SE on tax return *Minus half of the calculated tax amount for determining your adjusted gross earnings. How Does SECA Tax Work If I Also Have Employment Earnings? You may get a paycheck from an employer as well as having a side business that is profitable and gets you Social Security benefits. In general, your FICA earnings are considered first for Social Security benefits, but it's a little more complicated than that. Note Read more about how the two types of taxes - FICA tax and SECA tax - work together to provide you with retirement benefits. Should I Minimize My Business Earnings to Pay Less Self-Employment Tax? It's tricky. If your business has no income or has a loss for a year, you don't have to pay SECA tax for that year. But that also means that self-employment income isn't included in your Social Security benefit calculations for that year. You may want to minimize the SECA tax (using tax avoidance NOT tax evasion). But your business income may be your ticket to Social Security benefits in retirement. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Social Security Administration. "What are FICA and SECA Taxes?" Accessed April 17, 2020. IRS. "Self-Employed individuals Tax Center." Accessed April 17, 2020. IRS. "Self-Employment Tax (Social Security and Medicare Taxes)." Accessed April 17, 2020. IRS. "Schedule SE Self-Employment Tax. " Accessed April 17, 2020. Related Articles How To Report and Pay Independent Contractor Taxes How Do I Calculate Estimated Taxes for My Business? Should My LLC Be Taxed as an S Corp or C Corp? Can Your Small Business Get a Tax Refund? These Are All the Taxes Your Business Must Pay How To Calculate Social Security and Medicare Taxes What Business Tax Costs Can Be Deducted? Calculate and Pay Estimated Taxes for Your Business Payroll Taxes: The Basics for Employers What You Need To Know About Starting a Sole Proprietorship What Is the Self-Employed Contributions Act (SECA) Tax? How To File Taxes in Your 20s What Are Self-Employment Taxes? How to Calculate and Pay Self-Employment Taxes How an S Corporation Pays Taxes Self-employment Tax and Employment Tax Newsletter Sign Up By clicking “Accept All Cookies”, you agree to the storing of cookies on your device to enhance site navigation, analyze site usage, and assist in our marketing efforts. Cookies Settings Accept All Cookies