How to use Schedule SE to determine your self-employment taxes

Editor’s note: Starting a business this year? Learn more about IRS Schedule SE, a common tax form used by entrepreneurs to determine payroll taxes.

As a traditional employee, your employer takes on a portion of the cost of certain types of taxes. So, if you work for yourself, you take on the responsibility of paying that additional tax.

This extra tax is called “payroll tax”. It refers to the Social Security and Medicare tax on an employee’s wages and salaries. One half of these taxes are taken out of employees’ paychecks and the other half is paid by the employer.   

If you’re self-employed, you are required to pay both the employee and employer portions of Social Security and Medicare taxes. This is referred to as self-employment (SE) tax.

What is Schedule SE?

Now that we covered what self-employment tax is, we can answer “what is Schedule SE?” and introduce the tax schedule that determines and reports it. It’s the Schedule SE, “Self-Employment Tax”.  It’s filed with Form 1040, 1040-NR, or 1040-SR.

How much is self-employment tax?

The amount will be different for each person, but there are rates and limits you can apply to determine how much you need to pay.

Up to $142,800 of your net earnings from self-employment income are taxed at 15.3% (with 12.4% for Social Security and 2.9% for Medicare). Net earnings exceeding this amount are taxed at 2.9%. An additional Medicare tax rate of 0.9 % applies to self-employment income above a threshold amount.

The maximum Social Security contribution is $17,707.20 ($142,800 X 12.4%).

There is no limit on the amount of income subject to the Medicare portion of SE tax.

Who files a Schedule SE tax form?

If you worked as a contractor either part- or full time, you will likely be responsible for self-employment tax. In fact, every self-employed person with net earnings of at least $400 needs to include a Schedule SE with Form 1040.

Self-employed persons for self-employment tax purposes will fall into one of these categories:

• Contractors receiving non-employee compensation
• Individuals who file business taxes on a Schedule C
• Partners who actively provide services to partnerships (including multiple-member LLCs who file a partnership return)
• Single-member LLC owners
• Sole proprietors

If you are a religious leader, you may also need to file a Schedule SE. This is the case if you have clergy income of $108.28 or more.

How is the Schedule SE form used?

The Social Security Administration (SSA) uses the information received from the IRS about your self-employment taxes along with your payroll taxes to determine your Social Security benefits. You have to pay self-employment tax on net self-employment earnings no matter your age or if you’re already getting Social Security or Medicare benefits.

Methods for calculating Schedule SE

Here’s a summary of how to fill out Schedule SE:

• Top of the form: Enter your name and Social Security number
• Part 1: Self-employment tax
• Part 2: Optional methods to figure net earnings
• Part 3: Maximum deferral of self-employment tax payments

View the IRS instructions for Schedule SE. The Schedule has multiple lines—26 to be exact—which can get complicated.

Be mindful that help is in your corner. If you don’t want to tackle your Schedule SE or other complex tax schedules, get help with your small business taxes from the team at Block Advisors.

There is a short schedule SE form, which is an abbreviated form to the normal schedule. You can find it here.

Long-form methods for calculating Schedule SE:

There are three methods on the long-form for calculating self-employment tax—regular method, farm optional method, and nonfarm optional method.

Regular method:

Generally, the regular method determines self-employment tax owed, if your net earnings from self-employment are $400 or more, by multiplying your net earnings from self-employment by 15.3%.

To calculate your net earnings using the regular method, subtract your business expenses from revenues, then multiply the amount by 92.35%. You can also deduct 50% of your self-employment tax.

Optional methods:

The optional methods may give you credit toward your Social Security coverage even though you have a loss or a small amount of income from self-employment and may qualify you to claim a variety of credits such as the Earned Income Tax Credit, Additional Child Tax Credit, or Child and Dependent Care Credit (or give you a larger credit). However, using the optional methods may increase your SE tax.

Farm optional method:

If you have income from farm self-employment, use the farm optional method to determine your net earnings if your gross farm income was $8,460 or less, or your net farm profits were less than $6,107.

Nonfarm optional method:

If you have nonfarm self-employment income, you can use this method to figure your net earnings if your profits were less than $6,107 and less than 72.189% of your gross income. To use the nonfarm optional method, you must be self-employed and have $400 or more in earnings. And, you can only use this method for five years.

You can use both the farm optional method and the nonfarm optional method when calculating self-employment tax.

Where to enter Schedule SE calculations

You’ll enter the Schedule SE data as follows on your Form 1040:

1 – SE tax is reported on Schedule 2, line 4.

2 – The deduction for one-half of SE tax is reported on Schedule 1, line 14.

Help with IRS Schedule SE

Small business and self-employed taxes are frankly more complicated than taxes for a typical tax filer. Especially when you have to file complicated tax schedules like IRS Schedule SE. Because of this, it may be to your benefit to get help from a specialized tax pro.

At Block Advisors, we’re experienced in serving businesses like yours.

Schedule a time to meet with your tax pro in person, or via phone, video or chat.

“My small business certified tax pro helped me because this is my first year earning money through self employment. I’ve never asked a question that she couldn’t answer.”

– Charlotte Stewart, Web Consulting and Design | APril 2021