Self-Employment Taxes vs. Employment Taxes
The easy answer to this one is: They're the same, really. There are just different names for the same taxes, and the tax rates are essentially the same too.
Self-employment taxes are taxes paid to the Social Security Administration for Social Security and Medicare, based on earnings from a business you own (not a corporation). Self-employment tax is also called "SECA" tax (from the Self-Employed Contributions Act). The tax rate for self-employment income is 15.3% for Social Security and Medicare, based on the net earnings of the business. The maximum Social Security earnings are set each year; if your business income exceeds the maximum, no Social Security tax is imposed on the amount over the maximum. Medicare tax is imposed on all net earnings, with no maximum.
Employment taxes are paid to the Social Security Administration for Social Security and Medicare, based on earnings from employment with an employer. These taxes, called FICA taxes, are shared by the employee and employer, so each pays 7.65%, up to a total of 15.3%. The same Social Security maximum amount applies to FICA taxes.
Tax Return Deductions for Self-Employment Taxes
If this seems unfair to self-employed individuals, consider that there are two adjustments (deductions) made for self-employment income on your Form 1040. The Social Security Administration says:
The deductions are intended to make sure self-employed people are treated in much the same way as employers and employees for Social Security and income tax purposes.
- First, your net earnings from self-employment are reduced by an amount equal to half of your total Social Security tax. This is similar to the way employees are treated under the tax laws in that the employer's share of the Social Security tax is not considered income to the employee.
Second, you can deduct half of your Social Security tax on the IRS Form 1040 (line 27). This means the deduction is taken from your gross income in determining adjusted gross income. It cannot be an itemized deduction and must not be listed on your Schedule C.