Self-employment tax (SE tax) is a social security and Medicare tax
for individuals who work for themselves. It is similar to the social
security and Medicare taxes withheld from the pay of wage earners.
You must figure SE tax yourself using Schedule SE. Social security
and Medicare taxes of wage earners are figured by their employers.
Also, you can deduct half of your SE tax from your adjusted gross
income. Wage earners cannot deduct social security and Medicare taxes.
SE tax rate.
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).
Maximum earnings subject to SE tax.
Only the first $76,200 of your combined wages, tips, and net
earnings in 2000 is subject to any combination of the 12.4% social
security part of SE tax, social security tax, or railroad retirement
(tier 1) tax.
All your combined wages, tips, and net earnings in 2000 are subject
to any combination of the 2.9% Medicare part of SE tax, social
security tax, or railroad retirement (tier 1) tax.
Fiscal year filer.
If you use a tax year other than the calendar year, you must use
the tax rate and maximum earnings limit in effect at the beginning of
your tax year. Even if the tax rate or maximum earnings limit changes
during your tax year, continue to use the same rate and limit
throughout your tax year.
Self-employment tax deduction.
You can deduct half of your SE tax in figuring your adjusted gross
income. This deduction only affects your income tax. It does not
affect either your net earnings from self-employment or your SE tax.
To deduct the tax, enter on
Form 1040, line 27, the
amount shown on the "Deduction for one-half of self-employment tax"
line of the Schedule SE.
Why Pay Self-Employment Tax?
Social security benefits are available to self-employed persons
just as they are to wage earners. Your payments of SE tax contribute
to your coverage under the social security system. Social security
coverage provides you with retirement benefits, disability benefits,
survivor benefits, and hospital insurance (Medicare) benefits.
By not reporting all your self-employment income, you could cause
your social security benefits to be lower when you retire.
How to become insured under social security.
You must be insured under the social security system before you
begin receiving social security benefits. You are insured if you have
the required number of credits (also called quarters of coverage). It
does not matter whether the income is earned in one quarter or is
spread over two or more quarters.
Earning credits in 2000 and 2001.
You can earn a maximum of four credits per year. For 2000, you earn
one credit for each $780 ($830 for 2001) of income subject to social
security taxes. You need $3,120 ($780 x 4) of self-employment
income and wages to earn four credits in 2000. For 2001, you will need
$3,320 ($830 x 4) of self-employment income and wages to earn
four credits.
For an explanation of the number of credits you must have to be
insured and the benefits available to you and your family under the
social security program, consult your nearest Social Security
Administration (SSA) office.
Making false statements to get or to increase social security
benefits may subject you to penalties.
The Social Security Administration (SSA) time limit for
posting self-employment income.
Generally, the Social Security Administration will give you credit
only for self-employment income reported on a tax return filed within
3 years, 3 months, and 15 days after the taxable year you earned the
income. If you file your tax return or report a change in your
self-employment income after this time limit, SSA may change its
records, but only to remove or reduce the amount. SSA will not change
its records to increase your self-employment income.
How To Pay Self-Employment Tax
To pay SE tax, you must have a social security number (SSN). This
section explains how to:
- Obtain a social security number, and
- Pay your SE tax using estimated tax.
Obtaining a Social Security Number
If you never had an SSN, apply for one using
Form SS-5,
Application for a Social Security Card. You can get this
form at any Social Security office or by calling
1-800-772-1213.
You can also download Form SS-5 from the Social Security
Administration web site, www.ssa.gov.
If you have a social security number from the time you were an
employee, you must use that SSN. Do not apply for a new one.
Replacing a lost social security card.
If you have a number but lost your card, file
Form SS-5. You
will get a new card showing your original number, not a new number.
Name change.
If your name has changed since you received your social security
card, complete Form SS-5 to report the name change.
Paying Estimated Tax
Estimated tax is the method used to pay tax (including SE tax) on
income not subject to withholding. You generally have to make
estimated tax payments if you expect to owe tax, including
self-employment tax, of $1,000 or more when you file your return. Use
Form 1040-ES,
Estimated Tax for Individuals, to figure and pay the tax.
How to avoid paying estimated tax.
If you are self-employed and you are also an employee, you may be
able to avoid paying estimated tax by having your employer increase
the income tax taken out of your pay. Use
Form W-4 to increase
your withholding.
Penalty for underpayment of estimated tax.
You may have to pay a penalty if you do not pay enough estimated
tax by its due date.
More information.
For more information on estimated tax, see Publication 505.
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