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Self-Employment Tax

What is Self-Employment Tax?

Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. Your payments of SE tax contribute to your coverage under the social security system. Social security coverage provides you with old age, survivor, disability insurance (OASDI), and hospital insurance (HI) a.k.a Medicare benefits.

More on Self-Employment Tax

  • Self-employment tax is imposed on individuals who work for themselves (e.g. sole proprietor, independent contractor, partner). The combined tax rate is normally 15.3%, of which medicare portion is 2.9%.
  • The full self-employment tax is capped at $110,000 for 2012, while Medicare portion (2.9%) applies to all the self-employment earnings.
  • Income from self-employment generally includes all items of business income less business deductions. The income does not include charitable contributions, personal interest, dividend, rents, capital gains and looses, gains and losses on disposition of business property, and S corporation income distribution.
  • Wages subject to FICA tax are deducted from $110,000 for 2012 in determining the amount of income subject to self-employment tax.
  • No tax if net earnings from self-employment are less than $400.
  • A deduction equal to one-half of the self employment tax rate (7.65%) multiplied by taxpayer’s self-employment income(without regard to this deduction) is allowed in computing taxpayer’s net earnings from self-employment. This deduction is allowed to reflect the adjustment, as employees do not pay FICA tax on the employer’s portion of FICA tax which is 7.65%.
  • Individuals normally deduct 50% of the self-employment tax for AGI.


If a taxpayer has a self-employment income of $140,000. His deemed deduction would be 7.65% that is ($140,000 x 7.65%) = $10710. So his self-employment earnings would be $140,000 – $10710 = $129,290. The FICA tax would be [$110,000 x 15.3%] + ([129,290-110,000] x 2.9%) = $17389.41. In computing AGI, taxpayer may deduct half of self-employment taxes i.e. $17389.41 x 0.5 = $8694.71


Schedule SE – Self Employment

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