You have to wear a lot of different hats when you’re self-employed. Yes, it can be cool when you wear the HR hat because you don’t have to track your vacation days. But when you’re rocking your accounting hat, you’re stuck keeping track of income, expenses and taxes . . . ugh.
Not only do you have to keep track of more tax info, you also have to pay more taxes. When you work for someone else, your employer is required to pay half of your Medicare (2.9%) and Social Security (12.4%) taxes (sometimes called FICA). 1
But when you’re self-employed, you have to pay all 15.3% of FICA on your own. The IRS calls this the self-employment tax. (We just call it a bummer.) But come tax time, you’ll need to file a Schedule SE tax form to pay your self-employment tax.
What Is Schedule SE?
IRS Schedule SE is a one-page tax form used to calculate your self-employment tax. SE stands for—you guessed it—self-employment. (Aren’t those guys at the IRS clever?)
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You’ll need to file Schedule SE when you do your taxes at the end of the year. But before you fill out Schedule SE, you’ll have to fill out another form called Schedule C. Ugh, yet another form! Seriously though, when you’re self-employed, you get buried in tax forms.
Schedule C is where you report the money you made and subtract your expenses. It’s also where you can list self-employment tax deductions, like home office expenses, advertising, vehicle use, office supplies, equipment, software, business travel and meals, and more.
Who Needs to File Schedule SE?
The IRS requires everybody who nets over $400 in self-employment income to file Schedule SE.2 Even the smallest side hustle will top the $400 threshold pretty quickly.
The 15.3% self-employment tax is a big chunk of change, so you’ll want to make sure you keep track of your income and expenses. You don’t want to end up paying more taxes than you need to.
And just a quick note: If you expect to owe more than $1,000 in taxes at the end of the year, you’ll need to estimate your taxes and make quarterly payments to the IRS.
If keeping up with tax payments and forms isn’t your thing, let a tax pro handle it for you!
What Is Self-Employment Income?
The money you make from running your own business is considered self-employment income. That’s kind of a no-brainer. But there are lots of other ways to earn self-employment income.
That money you made driving for Uber or mowing lawns? It’s self-employment income. How about the cash you got from your side hustle baking and selling cookies? Yep, it’s taxable. Whether you’re selling stuff online, working as an independent contractor, or picking up part-time gigs—it all counts as self-employment income.
Where Do I Find My Self-Employment Income?
We mentioned Schedule C as the place to report your self-employment income. But how do you know how much to include on Schedule C?
If you worked as an independent contractor, the company you worked for should send you a 1099-NEC form that lists how much you earned. If you sold stuff and used a digital payment processor to collect money, your processor will send you a 1099-K listing your total sales.
If you run your own business—say as a plumber or hairdresser—you probably won’t receive 1099s. But even if you don’t receive 1099s, it’s still your responsibility to keep track of your earnings and report them on Schedule C.
How to Fill Out Schedule SE
Whether you’re filling out an electronic Schedule SE or an old-fashioned paper one, it’s not super complicated (by IRS standards). Here’s a line-by-line breakdown of Schedule SE:
- Line 1a, 1b: Net farm profit or loss. If you raise crops or cattle for a living, these two lines are where you include your income and/or conservation program payments.
- Line 2: Net profit (or loss) from the Schedule C. Flag this line because this is where you enter how much you earned from being self-employed.
- Line 3: Add lines 1 and 2.
- Line 4: Multiply line 3 by 92.35%. If the answer is less than $400, you don’t owe any self-employment tax.
- Line 5: Church employee income.
- Line 6: The amount of church employee income that’s taxable.
- Line 7: The maximum amount subject to the Social Security tax ($142,800 for 2021).
- Line 8: This is where you add any regular wages you already paid FICA on.
- Line 9: Subtract line 8 from 7 to see how much of your self-employment income is subject to the self-employment tax.
- Line 10: Calculate your Social Security tax by multiplying your income by 12.4%.
- Line 11: Calculate your Medicare tax by multiplying your income by 2.9%.
- Line 12: Add lines 10 and 11, and this is your self-employment tax.
- Line 13: Multiply your self-employment tax by 50%, and you can deduct that on Form 1040.3
Can I Deduct Self-Employment Tax?
Did your eyes glaze over after reading a line-by-line description of Schedule SE? You might have missed the one bright spot on the form: You can deduct half of your self-employment tax off your income!
You read that right. The IRS considers the employer portion of FICA a business expense, so you can subtract it from your taxable income when you fill out your 1040. That’ll save you some cash on your tax bill.
Hire a Pro to Handle Your Taxes
Listen, taxes are confusing—and they get even more complicated when you’re self-employed. If you’re feeling overwhelmed, an Endorsed Local Provider (ELP) can help. These are RamseyTrusted tax advisors in your area who’ll do whatever it takes to help you win with taxes.