Self Employment Tax

What is the Self Employment Tax?

Simply put, Self Employment Tax is the Social Security and Medicare taxes that self-employed people who earn income must pay. A common misconception is that the Self Employment Tax is the only tax that self employed people have to pay, but that isn’t true. Self Employment Tax must be paid in ADDITION to your Federal Income Tax and State Income Tax.

Who has to Pay Self Employment Tax?

As the name of the tax implies, anyone who earns money online as a self employed person must calculate their own self-employment tax using Schedule SE (Form 1040) and report it on their income tax return. This applies to everyone who earns money online including those who earn money on Adsense,,, or any other ad network / affiliate program. Those who earn money doing freelance work (Designers/Programmers/Writers/Etc) also must pay Self Employment Tax.

Sole Proprietorships (Single person businesses), Partnerships, and even members of LLCs must pay Self Employment Tax. Only S-Corporations, C-Corporations, and LLCs that elect to be taxed as S-Corporations don’t have to specifically pay Self Employment Tax (They still have to pay Social Security and Medicare Tax, so there’s no way to avoid this tax altogether, but there are ways to minimize it – if you’re interested see our Reducing Your Self Employment Tax article.

Self Employment Tax Rate

The self employment tax rate for the year 2011 is 13.3% (10.4% for Social Security and 2.9% for Medicare). Normally the self employment tax rate is 15.3% (12.4% for Social Security and 2.9% for medicare), but the 2010 Tax Relief act reduced this tax to 13.3% for the year 2011. The self employment tax is set to rise back up to 15.3% in 2012. Individuals must pay 13.3% tax on the first $106,800 earned and 2.9% on all income above $106,800. The reason for this is the Social Security component of the Self Employment Tax (Which is 10.4%) is only levied on the first $106,800 while the Medicare component (which is 2.9%) is levied on all income.

Self Employment Tax Deduction

You are allowed to deduct half of your self-employment tax on your tax return when calculating your adjusted gross income. This will reduce your overall income tax burden, but it will not affect your Self Employment Tax.

For additional information on the Self Employment Tax, simply check out the IRS official website on the tax:,,id=98846,00.html

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