Self Employment and Social Security

Social Security benefits are available to owners and workers in the small-business sector. Self-employed sole proprietors are required to pay Social Security and Medicare taxes in addition to federal tax on their income. Sole proprietors file Schedule SE, Self Employment Tax as part of their annual federal tax return, paying into the Social Security and Medicare systems. Both incorporated and sole proprietor-owned small businesses use IRS form 941 for paying payroll and Social Security taxes for their employees, but in this case the Social Security tax is based on payroll amounts rather than business income.

Sole Proprietors

Sole proprietors file a Schedule C, Profit or Loss from Business along with their form 1040 each year with the IRS. Business income and expenses are reconciled on Schedule C to calculate net profit for the year. The net profit is entered on Schedule SE. The sole proprietor figures out their self employment tax using this form. This tax consists of Social Security and Medicare taxes for those who run businesses as sole proprietors.

Schedule SE

Sole Proprietors earning more than $400 annually in net earnings from their business as figured on Schedule C must file the Schedule SE. Church employees who had income of $108.28 or more must also file Schedule SE. Self employed individuals receiving social security or medicare are required to file a Schedule SE regardless of age.

Self Employment Tax Deduction

Self employed sole proprietors can deduct a portion of their self employment tax on form 1040 in calculating their adjusted gross income. The deduction is equivalent to an employer contribution to social security that regular payroll employees are entitled to. The deduction affects only income tax, not self employment earnings or tax. The self employed are also eligible to take a deduction for health insurance costs. The instructions for form 1040 and schedule SE include information on claiming this deduction.

A Self Employed T-Shirt Geek

Self Employment Tax Rate

The Self Employment Tax Rate for 2011 and 2012 is 13.3 percent, with just over ten percent of it earmarked for social security. Income earned after $106,800 is not subject to the social security tax. The rate of self employment tax is subject to acts of congress and can change.

Form 941

Small business employers use IRS form 941, Employer’s Quarterly Federal Tax Return to remit payroll taxes to the IRS. They report and pay Social Security and Medicare taxes along with federal income tax withheld.