Wrong Treatment of Employees as Independent Contractors. If a worker is in reality an employee, but receives a Form 1099-MISC from the business paying the compensation, the worker has two choices:
- Go along with the way the business classified the worker, file Schedule C and Schedule SE, and pay self-employment (SE) tax on the earnings, or
- File Form SS-8 - If this form is filed the IRS will then decide if the worker should have been treated as an employee, along with tax withholding and paying one-half of the employee's FICA.
To see examples of workers that are considered self employed click here.
Who Pays Self-Employment Tax? Taxpayers pay SE tax when earnings from self-employment are $400 or more. A taxpayer is self-employed if he or she carries on a trade or business as a sole proprietor (including farmers) or as a general partner in a partnership. A trade or business generally is an activity carried on for a livelihood or in good faith to make a profit. (read more)
Net profit is calculated by subtracting ordinary and necessary trade or business expenses from your gross self-employment income. You are self–employed for this purpose if you are a sole proprietor, an independent contractor, a member of a partnership, or are otherwise in business for yourself. You can be liable for paying self–employment tax even if you are currently receiving social security benefits. Facts and circumstances determine whether or not an activity is a trade or business. A taxpayer does not actually have to make a profit to be a trade or business. For more detailed information on Self-Employment Tax, see Publication 334.
Claiming all deductions. Failing to claim all deductions related to self-employment violates the Self-Employment Contributions Act of 1954. The act requires every taxpayer to claim all of his or her allowable deductions, including depreciation, in computing net earnings from self-employment for SE tax purposes. Penalties apply for making a false statement or representation in connection with any matter arising under the act.
Self-Employment Tax Optional Methods. There are optional methods designed to give taxpayers credit for Social Security coverage in years when the taxpayer otherwise has a loss or small amount of income from self-employment. They may also be used to help taxpayers qualify for the earned income credit, the additional child tax credit, the child and dependent care credit, and the self-employed health insurance deduction.
If you had a small profit or net loss from your business but want to pay into the social security system, you may be eligible to use one of the two optional methods to compute your net earnings from self-employment.
- Farm optional method
- Nonfarm optional method
If you are an employee of a church or qualified church-controlled organization that elected exemption from social security and Medicare taxes, and you are not yourself exempt from self-employment tax, you must pay self-employment tax if you are paid more than an amount specified by law in a year from the church or qualified church-controlled organization. If you are required to pay self-employment tax, you must file Form 1040 and attach Schedule SE. For more information on church related income and self-employment taxes, see Publication 517.
NOTE: This is a guide on entering Schedule SE into the TaxSlayer program. This is not intended as tax advice. For additional information refer to the Additional Links below.
|Type of Worker||SE Tax Requirements|
|Employee||No SE tax, subject to FICA withholding.|
|Hobby income||Not subject to SE tax.|
|Partners and LLC members||
Guaranteed payments and a general partner’s distributive share of income are subject to SE tax. A limited partner’s distributive share is not. There is currently no official guidance if the same rules apply to an LLC member.
If a general partner dies during the year, earnings from self-employment include the distributive share of partnership profits through the end of the month in which the partner died.
Lifelong periodic payments are not subject to SE tax if the partner had no other interest in the partnership and did not perform services for the partnership during the year.
|S corporation shareholder||
Distributive share of earnings are not subject to SE tax. Wages paid for services performed subject to FICA.
|Share crop farming||
Producing crops or livestock on someone else’s land for a share of the crops or livestock is subject to SE tax, as is the landlord’s income if he or she materially participates in the farm activity.
|Department of Agriculture||
Payments for participating in a land diversion program are subject to SE tax.
|Community property states||
State laws that say income is earned on-half by each spouse do not apply to SE tax. The spouse who actually earns the income is subject to SE tax.
|Covenant not to compete||Not subject to SE tax.|
|Insurance agent (self-employed)||
Subject to SE tax on regular, renewal, and deferred commissions, if earned prior to retirement. Exception: Covenant not to compete.
|Rental real estate||
Not subject to SE tax unless substantial services are provided, such as a hotel or tourist camp.
|Newspaper and magazine sales||
Under age 18, exempt from SE tax. Age 18 or older, subject to SE tax.
Exempt from SE tax. Enter 'Exempt-Notary' on SE tax line of Form 1040.
|Interest on accounts receivable||
Subject to SE tax if received in the course of trade or business.
|Net operating loss||
Carryovers from other years do not reduce current year earnings for SE tax calculation purposes.
|Fishing vessel crew members||
Subject to SE tax if compensation based on share of catch and average crew size is less than 10. Crews of 10 or more are considered employees.
|Corporate director fees||Subject to SE tax.|
|Estate fiduciary fees||
Not subject to SE tax unless taxpayer is a professional fiduciary or an active participant in the estate’s trade or business.
Not subject to SE tax unless due to the business use of Section 179 or 280F property falling to 50% or less.
|Church employees (not a minister or religious order member)||
Must pay SE tax on wages exceeding $108.22 (unless minister or member of religious order) if employer has a certificate in effect electing an exemption from employee Social Security and Medicare taxes.
|Ministers and members religious order||
Pay SE tax on salaries and other income for services performed as an ordained, commissioned, or licensed minister, member of a religious order, or a Christian Science practitioner. Housing allowance income may be subject to SE tax. Exceptions: A minister or Christian Science practitioner can apply for exemption from SE tax by filing Form 4361. A member of a recognized religious group can file for and exemption from SE tax if he or she is conscientiously opposed to accepting Social Security or Medicare benefits, by filing Form 4029. Services performed by a member of a religious order who has taken a vow of poverty is exempt from SE tax.
|U.S. citizen employed by foreign government||
Subject to SE tax only if the services are performed in the U.S., Puerto Rico, Guam, American Samoa, the Commonwealth of the Northern Mariana Islands, or the Virgin Islands.
|Foreign earned income||
U.S. citizens living and working outside the U.S. are subject to SE tax on SE earnings, unless the U.S. has a Social Security exemption agreement with the foreign country. The foreign earned income exclusion for income tax purposes does not apply to SE tax.
|State and local government employees||
Certain fee basis government employees not covered under a Social Security agreement may be subject to SE tax.