How to Calculate for Self-Insured

A calculator and Schedule C (Form 1040) will be major helps in calculating self-insured tax.

Self-employed persons are solely responsible for the whole amount of their health insurance contributions; hence, they are frequently referred to as the self-insured. Contrary to employees, who share the burden of cost with their employers, the self-insured must pay self-employment tax, which includes both their Social Security contributions and their Medicare taxes. To calculate the amount of the tax, bear in mind that tax rates are constantly fluctuating.

Instructions

1. Use Internal Revenue Service (IRS) Schedule C (Form 1040) to write down your business income and expenses. It is imperative to consult the form, as there are expenses, such as travel, meals and entertainment, that are easy to forget.

2. Subtract the total amount of expenses from the total amount of income. The result will be your net profit.

3. Multiply the net profit by 0.6665 to find your net earnings, because your net earnings from self-employment are reduced by half of your total Social Security tax. If your earnings exceed $400, then you are liable to pay self-employment tax.

4. Multiply your net profit by 0.133 to find out your self-employment contributions for the current tax year. You do this calculation because the self-employment tax rate, as of 2011, is 13.3 percent, for net earnings up to $106,800. If your earnings exceed this amount, then you are liable for additional Medicare contributions.

5. Subtract $106,800 from the total amount of your net earnings, and multiply the result by 0.029, since the Medicare portion of the tax is 2.9 percent. For example, if you had earnings of $200,000 for the tax year 2011, then $200,000 - $106,800 = $93,200, multiplied by 0.029, it equals $2,702.80.

6. Add the additional Medicare contributions to the maximum full self-employment tax amount ($106,800 --- 0.133 = $14,204.40) to calculate the total amount. For the example, it is $14,204.40 + $2,702.80 = $16,907.20.

Tips & Warnings

• Members of the clergy and members of recognized religious sects can apply for exemption from self-employment tax.

• Be careful about the year of the rates. Make sure you do not calculate your self-employment tax based on outdated data. For example, for 2010, the combined self-employment tax rate -- Social Security and Medicare taxes -- was 15.3 percent and 2.9 percent for Medicare. For 2011, the rates were 13.3 and 2.9 percent, respectively.

• Be careful not to confuse Schedule C (Form 1040), Profit or Loss From Business, with Form 1040-C, U.S. Departing Alien Income Tax Return.

References

• IRS: Self-Employment Tax (Social Security and Medicare Taxes)
• Social Security Administration: If You Are Self-Employed

Resources

• IRS: Publication 517 (Containing Tax Exemption Information)
• IRS: Small Business and Self-Employed Tax Center