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Schedule SE Social Security Self-Employment Tax

Sole proprietors do not contribute to the social security and Medicare system through payroll deductions. Instead, they pay these taxes with their federal income tax. Even though this is an annual form, we are discussing it now because it must be calculated and paid quarterly with IRS 1040ES.

You don't have to make quarterly payments on social security or Medicare if your net self-employment income was less than $400.

Forms to use

Schedule SE Social Security Self-Employment Tax

How often

Quarterly deposit with IRS 1040ES.

Annual reporting requirement. Include Schedule SE with your 1040 personal return.

Tax rate

There are two parts to this tax:

Social security 12.4% (.124) of the first $118,500 of net income from your sole proprietorship
Medicare 2.9% (.029) of ALL net income
Total 15.3%

If you are used to only 7.65% payroll deductions, self-employment taxes seem high. However, employers have to match employee deductions. Therefore the REAL cost for regular employees is the same as what self-employed people pay.

Earn more than $200,000? There is a .9% Additional Medicare Tax on wages above $200,000 ($250,000 if married filing jointly). Click here for details.

More info

Please note:

  • The $118,500 limit is per person. You cannot use your spouse' payroll deductions to offset your social security self-employment tax.
  • Social security self-employment tax is NOT charged on non-business income (interest or dividends from your personal investments)
  • Social security self-employment tax is NOT charged on rental or royalty income.

Recalculate quarterly

Because your first year's income will be sporadic, you should re-calculate your social security self-employment tax each quarter.

Another job? Use Long Sch SE

If you also earned regular wages (or tips) that were reported on a W-2 form, AND the total wages plus your business' net income exceeded $118,500, you must complete Part I of the Long Schedule SE so that you do not pay too much social security tax. This is because social security taxes are only paid on the first $118,500 of your salary plus business net income.

Medicare is paid on all net business income, regardless of your salary from another job.

How to complete Sch. SE

Lines and what to enter

  1. Leave blank (for farms only)
  2. Calculate your business' net income. Do NOT include these items as expenses:
    • Any money that you took from the business as a draw or as "salary"
    • Social security self-employment tax
    • Health insurance premiums
    • Tax deferrals, such as contributions to pensions, profit sharing, etc.
    • Personal tax exemptions or standard exemptions
    • Carryover losses, gains, etc.
    • If you are completing this form to determine your estimated quarterly taxes, include an estimate of your business net income for the remainder of the year.
    • Add your spouse's income and any other sources of income.
  3. Same as line 2
  4. Multiply line 3 by .9235. This adjustment is made because ½ of social security is tax deductible.
  5. Multiply line 4 by .153 (.153= .124 social security + .029 Medicare). If line 4 is more than $118,500 (the cut-off for this year), calculate (118,500 x .129) + line 4 x .029.

If you are completing this to determine quarterly taxes: Enter your results on IRS 1040ES, line 11.

If you are completing final year-end tax returns: Enter your results (line 5) on IRS Form 1040 line 57 and ½ of the amount from line 5 on Form 1040, line 30.

Net income under $1,600? Long Sch. SE

If your net income was less than $1,600 and also less than 2/3 of your gross income, there is an alternative method of calculating social security self-employment tax. It will probably increase your taxes, but it will also increase the social security benefits you are entitled to. The worksheet is on the back of the Schedule SE (Part II).

Other employees?

Social security taxes for employees (i.e. non-owners) must be paid using different forms. See IRS 941, EFTPS payment for federal employment taxes and your state quarterly employer forms.

New tax rate

The social security self-employment tax maximum wage limit changes annually.

To pay

Social security self-employment tax should be paid quarterly with 1040ES. Schedule SE should be completed annually and mailed with each taxpayer's 1040 annual return.

Questions?

Call the IRS information hotline (800) 829-4933. For forms, call (800) 829-3676 or obtain them online at http://apps.irs.gov/app/picklist/list/formsPublications.html.

Federal Income Tax Payments: 1040ES

Pay quarterly estimated income tax payments on your business' net income.

Forms to use

1040-ES Worksheet, coupons and instructions

Amount due 15% to 39.6% on your share of the business' net income (plus your other personal income).

Single Married Hd Hsld Mar Mar/Fil Sep
10% on first $ net income 9,226 18,450 13,150 9,225
15% on next income up to: 37,450 74,900 50,200 37,450
25% on next income up to: 90,750 151,200 129,600 77,600
28% on next income up to: 189,300 230,450 209,850 115,225
33% on next income up to: 411,500 411,500 411,500 205,750
then 35% to 39.6%

To avoid penalties

To avoid penalties, you must pay 90% of this year's tax or 100% of last year's tax in normal employment withholding or estimated tax (this form). There are special requirements if your household income was over $169,740 or you are a fisherman. Please see 1040ES instructions.

How you should complete the form.

Lines and what to enter

  1. Take your share of the the annualized net income that you calculated with IRS 1040 Schedule SE. and add any other income you (or your spouse if you file jointly) expect to earn this year.
  2. To avoid IRS fines for incorrect estimates, just use the standard deduction. For 2013, this is $12,200 for married filing jointly; $8,950 for head of household and $6,100 for single.
  3. Line 1 minus line 2
  4. Multiply the number of personal exemptions by $3,900
  5. Line 3 minus line 4
  6. Tax. See tax rate schedules on page 2 of the instructions or the information shown above.
  7. Adjustments for alternative minimum tax, which is usually 0, unless you had large write-offs.
  8. Adjustments for alternative minimum tax, which is usually 0, unless you had large write-offs.
  9. Adjustments for credits, which are usually 0, unless last year you had tax credits and they still apply.
  10. Adjustments for credits, which are usually 0, unless last year you had tax credits and they still apply.
  11. Self-employment tax. See Schedule SE to calculate.
  12. Other taxes, which include employment taxes for household employees plus annuity, endowment or IRA taxes.
  13. Add lines 10, 11 and 12 and subtract any earned income credit. Earned income credit is not available to partner/owners of businesses.
    (13-c= Tax due this year.)
  14. Enter the smaller of 90% of line 13c or last year's tax on your 1040 return. Note. If you earned more than $150,000 last year, you should enter 90% of line 13c or 110% of last year's tax.
  15. Income tax that will be withheld during the year through payroll deductions (from other jobs).
  16. Tax that must be paid quarterly this year: Line 14c minus line 15.
  17. Deposit now: Divide line 16 by the number of quarterly due dates remaining before next April 15th, i.e. if you begin business on June 30, you will have two due dates: September 15th and January 15th.

Due dates

April 15, June 15, September 15, January 15.

To pay

Pay electronically

Questions?

Call the IRS information hotline (800) 829-1040. For forms, call (800) 829-3676 or obtain them online at http://apps.irs.gov/app/picklist/list/formsPublications.html.

Quarterly State Income Tax Payment: ESW

Forms to use

Payment Coupon IT

Estimated tax worksheet

How often?

Quarterly payment requirement

Tax rates

1-12.3% of the business's net income. Note: You should NOT be deducting payroll taxes (income tax, unemployment insurance, etc.) on any money that you take from the business as a business expense.

Paying Federal Taxes Electronically

If you registered for a federal employer ID number, you are automatically enrolled in the online payment system called EFTPS. EFTPS is used:

  • For your business: to pay employment taxes and to pay C-corporation taxes
  • For yourself: to pay 1040ES quarterly estimated taxes or any amount due on your 1040 return.

Forms to use

Pay online using EFTPS

Information about EFTPS

Receive PIN by mail

You should have receive your EFTPS PIN by mail after you registered for a federal employer ID number to receive a federal employer ID number.

Activate your registration and get your password

Call (800) 982-3256. You will be asked:

  • Information about your bank account: routing number, bank account numbers, and type of account (checking or savings)
  • To choose to verify your account (it takes 6 days, but is free and prevents errors)
  • To confirm that you consent EFTPS to withdraw funds from your account at your request
  • Your phone number

You will receive a confirmation number and temporary password (online you will be prompted to choose a new one).

To make a payment

Go to: https://www.eftps.com/eftps/index.jsp. Enter your Social Security number (or federal identification number of the employer), your PIN and Internet Password.

Payments by credit card?

The IRS accepts payments by credit card. Click here for more information.

Questions

Call the customer service unit of the EFTPS at (800) 555-8778 or visit: https://www.eftps.com/eftps/index.jsp