What is the Self-Employment Tax and Who has to Pay It?

The tax is divided into two parts – Social Security tax and Medicare tax.

• The Social Security portion is paid on all or part of your net earnings from self-employment income. The amount of income that is subject to Social Security tax is set by law and can change from year to year. For 2011, you pay this tax on the first $106,800, and none on amounts above that.
• The Medicare portion is paid on all of your net earnings from self-employment.

For 2011, you must pay self-employment tax and file Schedule SE (Form 1040) if either of the following applies:

• Your net earnings from self-employment (excluding church employee income) were $400 or more.
• You had church employee income of $108.28 or more.

Not everything, but pretty close to everything.

You pay Social Security tax on the first $106,800 (in 2011) of your net earnings from self-employment and none on amounts beyond that.

You pay Medicare Tax on all of your net earnings from self-employment.

This is where TurboTax really does the work for you.

When you enter the information for your self-employment income, TurboTax will automatically calculate the appropriate amount of taxes.

TurboTax will automatically complete form SE and calculate the self-employment tax.

This amount will be added to your income tax on your tax return to determine your refund or the amount that you owe.

Yes, but only half. The income tax and self-employment tax are really two different things even though they both get filed with your annual income tax return.

With  a business, the company pays a portion of the tax and the employee pays the rest. When a business pays its share, it usually gets to deduct that amount from income before calculating its income taxes.

A self-employed person is really both the employer and employee.

As a result, you get to deduct the employer portion from your income before your income taxes are calculated.

You can claim 50 percent of what you pay in self-employment tax as an income tax deduction.

If this sounds confusing, don’t worry, TurboTax takes care of all of this for you.

For more information on the self-employment tax, see IRS Tax Topic 554: The Self-Employment Tax and the IRS Publication 334, Tax Guide for Small Business.
For more information on church related income and self–employment taxes, refer to IRS Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers.