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Self-Employment Tax; A Closer Look at Social Security and Health Insurance

Self-Employment Tax; A Closer Look at Social Security and Health Insurance

It should be noted that once self-employment tax is mentioned, it refers only to social security and health insurance taxes and does not include any other tax that a self-employed is required to file.

What Is The Self-Employment Tax?

The tax on self-employment is a tax consisting of social security taxes and health insurance, mainly for self-employed persons. It is similar to Social Security and Medicare taxes deducted from the salary of most employees.

Self-Employment Tax (SE tax) is calculated using Schedule SE (form 1040). Social security and health insurance taxes for most employees are calculated by employers. You can also deduct the equivalent share of your SE tax from your employer in the correct calculation of gross income. Employees cannot deduct Social Security taxes and Medicare.

Self-Employment Tax Rate

The Self-Employment tax rate is 15.3%. The Commission is composed of two parts: 12.4% for social insurance (old-age, survivors' and invalidity insurance) and 2.9% for Medicare (hospitalization insurance).

In 2017, the first $127,200 in salary, consulting and net income are subject to a combination of social security tax rates for self-employment, social security or railroad tax reform (tier 1). The amount is increased to $128,400 by 2018.

All salaries, tips and net earnings for the current year are subject to any combination of 2.9% Employment Insurance, Social Security or Medicare Railroad Pension (tier 1).

If your wages and tips are subjected to either the Tier 1 part of railroad retirement tax or social security tax, or both, and total at least $127,200 do not pay the 12.4% social security tax on your net income. However, you must pay 2.9% of the Medicare SE tax on all of your net income.

An additional 0.9% tax rate for Medicare applies to salaries, commissions and self-employment income exceeding a certain threshold received during the years end.

If you use a year other than the calendar year, you must use the tax rate and the maximum income threshold in effect at the beginning of the tax year. Even if the tax rate or profit margin changes during the year, continue to use the same rate and the same limit for the entire year.

Deduction On Self-Employment Taxes

When calculating gross income, it is possible to deduct the equivalent amount of tax on the employer's labor account. This deduction only concerns income tax. This does not affect the autonomous gain of network activity or the autonomous workload.

If you are completing a Form C 1040, you may be able to apply for EITC (Earned Income Tax Credit) membership. 

Deduction Of Health Insurance Tax For Self Employment

In accordance with Section 2042 of the Law on the Use of Small Enterprises, it is possible to deduct for income tax purposes, self-employed workers for the cost of health insurance. This deduction is taken into account when calculating net income from self-employment. Refer to the instructions on Form 1040 and the SE program to calculate and claim a deduction.

Who Must Pay Self-Employment Tax?

It is necessary to pay the tax on self-employment and to file the Schedule SE (Form 1040) if any of the following situations occur.

  • Net income from self-employment (excluding church employees) was $400 or more.
  • You had an official church income of $108.28 or more.

In general, your net earnings from self-employment are subject to taxes on self-employment. If you are self-employed as a sole proprietor or independent contractor, generally, use a C or C-E plan to calculate your net income from self-employment.

If you have taxable self-employment income, use Schedule SE to calculate the net income of your independent business. Before you calculate your net income, you usually have to calculate the total taxable income that you self-assessed.

Note: Self-taxation rules apply regardless of your age and also if you already have social assistance or public health care.

Family Caregivers And Self-Employment Tax

The special rules apply to workers who provide residential services to seniors or persons with disabilities (caregivers). Caregivers are often hired by the people they serve because they work for seniors or people with disabilities, and they have the right to tell caregivers what to do. For more details, see Guardian Fees and Employment Taxes and Publication 926.

How To Pay Tax On Self-Employment

To pay the tax by yourself, you must have a Social Security Number (SSN) or an individual taxpayer identification number (ITIN).

Get A Social Security Number

If you have never had a social security number, ask for one using Form SS-5, Application for Social Security Card. You can get this form from any social security office.

Obtain An Individual Taxpayer Identification Number

The IRS will issue an ITIN if you are not a resident or a foreign national and you will not have and are not eligible to have SSN status. To apply for an ITIN, please send Form W-7, the individual IRS taxpayer's form.

Paying Self-Employment Tax With Estimated Taxes

As an independent, it may be necessary to submit estimated quarterly taxes. You can use these estimated payments to pay Self-Employment tax.

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