Calculating the Self-Employment Tax
The self-employment tax rate is 15.3% (2010) (less 2% credit in 2011 only for a total of 13.3%) for earnings up to the social security tax limit ($106,800 for 2010 and 2011). After that, the tax drops to just the Medicare tax of 2.9% on the balance above the limit. The tax is calculated and reported on Schedule SE.
The first $400.00 of self-employment earnings are not taxed. If your self-employment earnings are less than $400.00, or if you experienced a net loss, you do not need to file a Schedule SE, although you may want to file it to elect to pay self-employment tax. This optional election will be explained later in this article.
Follow the flow chart on the front of the Schedule SE to determine if you need to fill out the “short" section or the “long" section. Most self-employment tax is calculated by using the short form of the Schedule SE. This is a very simple calculation. The Schedule C earnings are carried to the form (Section A, Line 2 for 2010). This number is then multiplied by 92.35% to get the amount of income subject to the self-employment tax. The tax is 15.3% (2010) or 13.3% (2011) of this figure.
In 2010 only, you may subtract your self-employed health insurance payments from your self-employment earnings on Line 3. This deduction has not been renewed for 2011.
Once the tax is calculated, it is carried to the second page of the Form 1040 - (Line 56 for 2010). You will be able to deduct ½ of this tax as a deduction from income on the front of the Form 1040 (Line 27 of the 1040 for 2010).
One very important item to note is that the self-employment tax is independent of the Federal income tax. It is a tax in addition to the income tax. Itemized deductions and personal exemptions do not affect self-employment taxes. You will pay the calculated self-employment tax even if you do not owe any income tax. You may be able to subtract some refundable credits from the self-employment tax, such as earned income credit, additional child tax credit, American opportunity credit, and first time home-buyer credit. Most other credits, such as educational credits, regular child tax credits, and the credit for child and dependent care expenses, are not subtracted from the self-employment tax.