If you earn income from self-employment, freelance work, or as an independent contractor, you’re likely responsible for paying self-employment (SE) tax. This tax covers Social Security and Medicare taxes that would otherwise be split with an employer. The IRS requires taxpayers with net self-employment income of $400 or more to file Schedule SE with their Form 1040. This comprehensive guide breaks down how to file Schedule SE, who must file it, and strategies to reduce your tax liability.
What Is Self-Employment Tax?
Self-employment tax is comprised of two parts:
- 12.4% for Social Security (on net earnings up to an annual limit)
- 2.9% for Medicare (with no income cap)
High earners may also pay an additional 0.9% Medicare surtax on wages and self-employment income above certain thresholds ($200,000 for single filers, $250,000 for married filing jointly).
Who Needs to File Schedule SE?
You must file Schedule SE if:
- You had net earnings of $400 or more from self-employment
- You earned income as a sole proprietor, freelancer, gig worker, or independent contractor
- You received church employee income of $108.28 or more
Net earnings refer to your total self-employment income minus allowable business expenses. These expenses are typically calculated on Schedule C (Profit or Loss from Business).
Structure of Schedule SE
Schedule SE is divided into two sections:
- Short Schedule SE: For most self-employed taxpayers with straightforward income
- Long Schedule SE: For individuals with additional considerations, such as optional methods or multiple sources of SE income
Step-by-Step: Completing Schedule SE
Step 1: Calculate Net Earnings from Self-Employment
Use your Schedule C to determine your total net earnings. If you have multiple businesses, you’ll need to total the net earnings across all of them. Enter this figure on Line 2 of Schedule SE.
Step 2: Multiply by 92.35%
The IRS only subjects 92.35% of your net self-employment earnings to SE tax. Multiply your net earnings by 0.9235 and enter the result on Line 4a.
Step 3: Calculate SE Tax
Multiply the adjusted earnings (Line 4a) by 15.3% (0.153) to determine your total SE tax. Enter this on Line 5.
Step 4: Enter SE Tax on Form 1040
Transfer the amount from Line 5 to Schedule 2 (Form 1040), Line 4, which then flows into Form 1040, Line 23.
Step 5: Deduct Half of SE Tax
You’re allowed to deduct 50% of your self-employment tax when calculating your adjusted gross income (AGI). This amount appears on Line 13 of Schedule SE and is entered on Schedule 1 (Form 1040), Line 15, then on Form 1040, Line 10.
Optional Methods to Figure Net Earnings
There are two optional methods to calculate net earnings for SE tax purposes:
- Nonfarm optional method: For low-income filers with nonfarm business earnings
- Farm optional method: For farmers with low income or losses
These methods can be useful for claiming Social Security credits, even when income is low. However, they may increase your tax liability, so use them cautiously.
Medicare Surtax on High Earners
If your total earnings (including wages and self-employment income) exceed certain thresholds, you may be subject to an additional 0.9% Medicare surtax. This amount is not calculated on Schedule SE, but rather on Form 8959.
Common Mistakes to Avoid
- Not filing Schedule SE when required
- Forgetting to deduct business expenses on Schedule C
- Failing to include self-employment income from 1099-NEC or gig apps
- Not deducting half of SE tax, which lowers AGI
- Misreporting SE tax as income tax rather than payroll tax
Tax Planning Tips for Self-Employed Individuals
- Use a SEP IRA, SIMPLE IRA, or Solo 401(k): Reduce taxable income while saving for retirement
- Track expenses: Keep detailed records of deductions like home office, mileage, supplies, software, and health insurance
- Make quarterly estimated payments: Avoid penalties by paying taxes throughout the year using Form 1040-ES
- Hire a tax professional: Especially if you have multiple income streams or high deductions
Why Self-Employment Tax Is Important
The self-employment tax is what ensures self-employed individuals earn Social Security credits and remain eligible for Medicare and Social Security benefits later in life. Paying into the system gives you access to retirement benefits, disability coverage, and more.
Conclusion
Filing Schedule SE is an essential part of meeting your tax obligations as a self-employed individual. Understanding how to calculate and report self-employment tax ensures you stay compliant with IRS regulations and take full advantage of available deductions. Whether you’re a full-time freelancer, side hustler, or small business owner, knowing how to navigate Schedule SE can help you reduce your tax bill and secure your future Social Security and Medicare benefits.
