Business, Legal & Accounting Glossary
A self-employment tax is assessed by the IRS on the net income of individuals who work for themselves. The self-employment tax is a medicare and social security tax paid by self-employed individuals in order to receive social security and medicare benefits when they retire. As a general rule, if you are working for yourself (i.e. sole proprietor, individual contractor, or active members of a partnership) and generating net earnings above a minimal threshold (i.e. $400 or more in 2009), you will need to pay self-employment tax. Church employees receiving an income above a minimal threshold (i.e. $108.28 or more in 2009) must also pay self-employment tax. The self-employment tax is mandatory. Self-employed individuals must pay self-employment tax quarterly when they pay their estimated income tax. It is important to note that even if no estimated income tax is due, you are still required to make an estimated payment of your self-employment tax. Further, self-employment tax is due regardless of your age so if you are retired and receiving social security and medicare, you are still required to pay self-employment tax as long as you remain self-employed. Self-employed individuals must also file Schedule SE of IRS Form 1040 annually to report their self-employment tax liability. The self-employment tax is akin to the payroll tax paid by employees but unlike an employee who pays only half of his payroll tax liability (i.e. the employer pays the other half), a self-employed individual must pay 100% of his self-employment tax. To illustrate, for the tax year 2009, the social security portion of the self-employment tax was 12.4% of self-employment net income (up to $106,800). The other component of the self-employment tax, the Medicare portion, was 2.9% and applies to 100% of self-employment net income. This latter portion of the self-employment tax has no upper limit. Finally, an individual taxpayer identification number (ITIN) or a social security number (SSN) is required to pay self-employment tax.
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This glossary post was last updated: 5th February, 2020