Self-Employment Tax

A person is self-employed if he or she is a sole-proprietor of a trade or business or an independent contractor. A sole-proprietor is a person who owns an unincorporated business. Independent contractors are people who do not work for an employer, but rather independently work in a trade, business or profession and offer their services to the general public. Generally, a person is considered an independent contractor if the payer has the limited right to direct the result of the work being done, but not how it is done.

A person is also considered self-employed if he or she is a partner of a trade or business or is in any other way in business for him or herself. A trade or business is generally characterized as an activity that is done to make a profit. If a taxpayer runs a business on a part-time basis, in addition to working for an employer on a full-time basis, he or she may still be considered self-employed for self-employment tax purposes. For example, suppose a person works full-time as a physical therapist during the week, but also works as an independent contractor teaching exercise classes on the weekends on a part-time basis. Because this person works as a self-employed independent contractor on a part-time basis, the income she earns from teaching exercise classes will be subject to the self-employment tax.

Self-employment tax is a Medicare and social security tax for taxpayers who work for themselves. If a taxpayer earns more than $400 as a self-employed person or more than $108.28 as a church employee, he or she must pay self-employment tax. Taxpayers use a Schedule SE (Form 1040) to figure out the self-employment tax that they owe. Taxpayers are permitted to deduct one-half of their self-employment tax in computing their adjusted gross income. The self-employment tax rate is 15.3%. Of that 15.3%, 12.4% is designated for social security and 2.9% is designated for Medicare. For the 2007 tax year, the maximum amount of income (including wages, tips and net earnings) subject to the social security portion of the self-employment tax is $97,500. There is no cap on the combined wages, tips and net earnings that are subject to the Medicare portion of the self-employment tax.

If a taxpayer earns income that is subject to self-employment tax from more than one trade or business, he or she must combine the profit or losses of each business to determine the total earnings that are subject to self-employment tax. If one business lost money, while another earned a profit, the loss can be used to reduce the profit from the second business.

A taxpayer who files a joint return with a spouse is not permitted to file a joint Schedule SE regardless of whether only one or both of the spouses have earnings that are subject to self-employment tax. If both spouses have earnings subject to self-employment tax, each must fill out a separate Schedule SE.

Preparing for a Meeting with Your Tax Attorney

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Preparing for a Meeting with your Tax Attorney

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