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How Does Self-Employment Tax Affect My Total Tax on My Form 1040?

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Question: How Does Self-Employment Tax Affect My Total Tax on My Form 1040?
If you are self-employed, you must pay SECA tax (Social Security and Medicare tax) on your self-employment income. But there are some additional changes that this tax makes to your personal Form 1040.
Answer:

The Social Security tax rate for 2013 is 15.3 percent on self-employment income up to $106,800. If your net earnings exceed $113,700, you continue to pay only the Medicare portion of the Social Security tax, which is 2.9 percent, on the rest of your earnings.

There are two income tax deductions that reduce your taxes.

  • First, your net earnings from self-­employ­ment are reduced by half of your total Social Security tax. This is similar to the way employees are treated under the tax laws, because the employer’s share of the Social Security tax is not ­considered wages to the employee.
  • Second, you can deduct half of your Social Security tax on IRS Form 1040. But the deduction must be taken from your gross income in determining your adjusted gross income. It cannot be an itemized deduction and must not be listed on your Schedule C.

If you have wages as well as self-­employ­ment earnings, the tax on your wages is paid first. But this rule is important only if your total earnings are more than $113,700. For example, if you will have $30,000 in wages and $40,000 in self-employment income in 2013, you will pay the appropriate Social Security taxes on both your wages and business earnings. However, in 201023, if your wages are $87,500 and you have $30,000 in net earnings from a business, you do not pay dual Social Security taxes on earnings more than $113,700. Your employer will withhold 7.65 percent in Social Security and Medicare taxes on your $87,500 in earnings. You must pay 15.3 percent in Social Security and Medicare taxes on your self-employment earnings up to $3800 and 2.9 percent in Medicare tax on the remaining $700 in earnings.

Back to All About Self-Employment and Self-Employment Taxes.

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