Self-Employment Taxes
First, self-employment taxes (SE tax) are those social security and Medicare taxes for individuals who work for themselves. It is no different from those social security and Medicare taxes withheld from the pay of most wage earners.
Self-employed individuals figure their SE tax using Schedule SE (Form 1040). They can deduct half of their SE tax in figuring their adjusted gross income. This affects only their income taxes and not their net earnings or their SE tax.
Regular wage earners have their Social security and Medicare figured by their employers. They cannot deduct their social security and Medicare taxes.
Requirements
If you are self-employed, you must pay SE tax if your net earnings from self-employment were $400 or more. (This does not include church employee income. The floor level for church employee income is $108.28 or more.)
Your net earnings from self-employment are based on your earnings subject to SE tax.
Use Schedule SE to figure your net earnings from self-employment if your earnings are subject to SE tax.
(The SE tax rules apply no matter how old you are. They apply even if you are already receiving social Security or Medicare.)
Rates
Your self-employment tax rate has two parts, 12.4% for social security (old age, survivors, and disability insurance), and 2.9% for Medicare (hospital insurance). Both adds up to a total of 15.3% SE tax rate.
Only the first $106,800 of your combined wages, tips, and net earnings is subject to the 12.4% social security portion of the SE tax. However, all your combined wages, tips and net earnings are subject to the 2.9% Medicare part of your SE tax.
Paying SE tax
You must have a social security number (SSN) or an individual taxpayer identification number (ITIN) in order to pay SE tax.
If you have no SSN yet, apply for one using Form SS-5, Application for a Social Security Card which can be obtained at any Social Security office. (You can download the form from the Social Security site.)
The IRS can issue you an ITIN if you are a non-resident or resident alien and do not have (and are not eligible to get) an SSN. You can file Form W-7, Application for IRS Individual Taxpayer Identification Number.
Who is classified as self-employed?
Lastly, you have to figure out which class of taxpayers you belong to – a regular wage earner working for a company or self-employed.
The IRS characterize you as a self-employed individual if (1) you carry on a trade or business as a sole proprietor or as an independent contractor, (2) you are a member of a partnership that carries on a trade or business and (3) you are otherwise in business for yourself.
If you are self-employed, then you must pay your SE taxes.
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