How to Calculate Self-Employment Tax

Self-employed persons, sole proprietors and certain designated workers pay Social Security and Medicare tax through their self-employment tax. Here are a few steps to help calculate taxes if you work for yourself.

Instructions

Difficulty: Moderately Easy

Things You’ll Need:

• Financial Statements
• Financial Calculator
• Paper And Pencils
• Computers
• Tax Software

1. Figure out your net income from self-employment. Net income is typically your total business receipts minus your total business deductions.
2. Multiply your net income from self-employment by 0.9235 (or 92.35 percent). Your answer is called your "net earnings" from self-employment. If this number is less than $400, you don't have to pay self-employment tax.
3. Multiply the amount of your net earnings that is $76,200 or less by 0.153 (or 15.3 percent), and multiply any net earnings over $76,200 by 0.029 (or 2.9 percent). Add your two answers together. This is your self-employment tax.
4. Report your self-employment tax on Schedule SE of the 1040.

Tips & Warnings

• You can deduct half of your self-employment tax in determining your adjusted gross income. Do this in the Adjustments section of the 1040.
• Interest, dividends, capital gains, rental income, pensions and other forms of unearned income are not subject to self-employment tax.
• If you operate more than one business, combine the net incomes together and use only one Schedule SE. You will find this very useful if one of your businesses operated at a loss.
• If you worked as an employee subject to W-2 withholding in addition to being self-employed and your combined earnings were more than $76,200, use the Long Schedule SE on the back of the form. Only the amount up to $76,200 is subject to the Social Security portion of the tax. But the Medicare portion is applicable to all of your earned income.
• Ministers, Christian Science practitioners and members of religious orders can file Form 4361 to seek a waiver from self-employment tax. Also, a waiver is available through Form 4029 for members of recognized religious sects that oppose insurance. The waiver may be permanently revoked by filing Form 2031 by April 15, 2002 (or an extended due date of the 2001 tax return).
• Church employees who earned more than $108.25 and had no Social Security and Medicare tax withholding are subject to self-employment tax.
• Members of partnerships that operate a trade or business are subject to self-employment tax on distributive income, including guaranteed payments.
• Fishing crew members, estate administrators, newspaper carriers, many real estate agents, former insurance agents, and statutory employees can be subject to self-employment tax. If you had earned income of any kind and didn't have W-2 withholding, you probably have to pay.
• Husbands and wives must fill out separate Schedule SE forms.