You usually must pay self-employment tax if you had net earnings from self-employment of $400 or more. Generally, net earnings from self-employment represent 92.35% of your net profit. Net profit is calculated by subtracting ordinary and necessary trade or business expenses from your total self-employment income. You are self-employed for this purpose if you are a sole proprietor, an independent contractor, a member of a partnership, or are otherwise in business for yourself. You can be liable for paying self-employment tax even if you are currently receiving Social Security benefits.

If you had a small profit or net loss from your business but want to pay into the Social Security system, you may be eligible to file Form 1040 Schedule SE and use one of the two optional methods to compute your net earnings from self-employment. See Publication 533, Self-Employment Tax, to see if you qualify to use an optional method. This method may also allow you to qualify for the earned income credit or the child and dependent care credit.

The tax rate for 1998 was 15.3% of your net earnings from self-employment. The maximum amount of net earnings and wages subject to the Social Security part, 12.4%, was $68,400. All of your net earnings are subject to the Medicare part, 2.9%. Self-Employment Tax is computed on Schedule SE of Form 1040 and reported on line 50 of Form 1040 for 1998. You are also entitled to an income adjustment equal to one-half of your self-employment tax for the year on line 27 of Form 1040 in figuring adjusted gross income.

If you are an employee of a church or qualified church-controlled organization that elected exemption from Social Security and Medicare taxes, you must pay self-employment tax if you are paid $108.28 or more in a year. If you are required to pay self-employment tax, you must file Form 1040 and attach Schedule SE. For more information on church related income and self-employment taxes see Publication 517.

More information on self-employment tax can be found in Publication 533. Forms and publications can be downloaded from this site, or ordered by calling 1-800-829-3676.

Tax Topics & FAQs | 1998 Tax Year Archives | Tax Help Archives | Home