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sherieedardis
New Member

Can anyone please explain Schedule SE, lines 7 and 9?

 
6 Replies
RayW7
Expert Alumni

Can anyone please explain Schedule SE, lines 7 and 9?

Line 7-See below for how the Social Security tax is calculated-

Line 9 is a summary line.

 

What is the self-employment tax?

Many newly self-employed people—sole proprietors, independent contractors and the like—are surprised at their tax bills at the end of the year because they notice they're suddenly paying a lot more in tax as a self-employed person than as an employee. That's because they're carrying the full burden of paying for their Social Security and Medicare.

When you're an employee, you share that cost with your employer, with each of you paying a share of the FICA tax. When you're self-employed, though, you're stuck with the full full amount yourself.

The tax is divided into two parts:

  • 12.4% for Social Security. For 2020, this part of the tax applies to the first $137,700 of earnings. If you earn more than that (from self-employment or, if you also have a job, from the combination of your job and your business), then the 12.4 percent part of the tax that pays for Social Security stops for the year.
  • 2.9% for Medicare. The Medicare portion of the self-employment tax doesn’t stop. No matter how much you earn, you'll pay the 2.9 percent Medicare tax. For more information on this tax, see IRS Tax Topic 554: The Self-Employment Tax.

How do I report the self-employment tax?

Of course, a new tax means new paperwork too. When you start a small business and you do not incorporate or form a partnership, you report the results of your operations on Schedule C and file it with your Form 1040.

You calculate your self-employment tax on Schedule SE and report that amount in the "Other Taxes" section of Form 1040. In this way, the IRS differentiates the SE tax from the income tax.

Good news

When figuring self-employment tax you owe, you get to reduce self-employment income by half of the self-employment tax before applying the tax rate. Say, for example, that your net self-employment income is $50,000. That's the amount you report as taxable for income tax purposes on Form 1040.

But when figuring your self-employment tax on Schedule SE, Computation of Social Security Self-Employment Tax, the taxable amount is $46,175. Not paying the 15.3 percent tax on $3,825 difference in this example saves you $585.

More good news

You can claim 50% of what you pay in self-employment tax as an income tax deduction. For example, a $1,000 self-employment tax payment reduces taxable income by $500. In the 25 percent tax bracket, that saves you $125 in income taxes. This deduction is an adjustment to income claimed on Form 1040, and is available whether or not you itemize deductions.

An example

  • You run a catering business as a sole proprietor.
  • In 2020 your net profit as reported on Schedule C is $35,000.
  • Your net earnings as calculated on Form SE would be $32,323 ($35,000 x 0.9235).
  • Your self-employment tax would be $4,945 (32,323 x 0.153) and you would report that amount on Form 1040 in the "Other Taxes" section.

Then you would report one-half of your self-employment tax, $2,473, ($4,945 X .50) on Form 1040 as an adjustment to income, which reduces your Adjusted Gross Income and the amount of income tax you owe.

Should I file estimated taxes?

If you have worked as an employee, you know that what you get in your paycheck is usually less than what you really made. Why? Because your employer withheld money for Social Security, Medicare and income tax and sent that money to the government.

When you are self-employed, the entire burden for paying employment taxes and prepaying estimated income tax liability is left to you. The government wants you to make payments of your estimated taxes throughout the year in quarterly installments. If you don't, you may be subject to underpayment penalties.

nebirah
Level 3

Can anyone please explain Schedule SE, lines 7 and 9?

Why is Line 7 of my Schedule SE showing over $130,000 -- when my combined wages and self-employment earnings subject to social security tax is about 10% of that?

 

TT error?

VolvoGirl
Level 15

Can anyone please explain Schedule SE, lines 7 and 9?

Line 7 is a set amount.  It is prefilled on the blank form.  It's just the max income you pay Social Security tax on.  If you make more than $137,000 you don't need to pay Social Security tax on you wages or self employment income. See the blank SE here, read it close.

https://www.irs.gov/pub/irs-pdf/f1040sse.pdf 

 

nebirah
Level 3

Can anyone please explain Schedule SE, lines 7 and 9?

Good to know @VolvoGirl thanks. I was curious why the font on that line (and the other line farther down) was more italicized. 

rowhoss
Level 1

Can anyone please explain Schedule SE, lines 7 and 9?

Does line 7 count also your W-2 wages? My self employment earning are 4K+ but line 7 is $100K+. Just want to make sure I am not paying self employment taxes on my W-2 wages. Thanks! 

VolvoGirl
Level 15

Can anyone please explain Schedule SE, lines 7 and 9?

No you don't pay the self employment tax on your W2 but the wages do count towards the max you can pay.

 

SE line 7 max is 137,700 total of Schedule C Net Profit and W2 Wages.  It includes your W2 wages so you do not pay self employment tax on income more than 137,700 total.

 

Like if your W2 wages were 120,000 and your self employment Net Profit is 30,000 you would only owe SS tax on 17,700 of the 30,000.

 

How much is your W2?  Unless it is over 137,700 and you already maxed out for Social Security, you owe SS tax on the $4,000 Net Profit.

 

Self Employment tax (Scheduled SE) is automatically generated if a person has $400 or more of net profit from self-employment.  You pay 15.3% SE tax on 92.35% of your Net Profit (If it is greater than $400).  The 15.3% self employed SE Tax is to pay both the employer part and employee part of Social Security and Medicare.  So you get social security credit for it when you retire.  

 

 

 

 

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