Self Employment Tax

The Self-Employment Tax

Updated for Tax Year: 2011

Are you starting your own business? Then get ready to pay the self-employment tax. TurboTax provides everything you need to prepare your tax return, make smart tax decisions, and get your biggest tax refund.

I'm starting a new business. Do I need to pay the self-employment tax?

So, you’ve started a business and freed yourself from the daily grind of that old job. But there’s no freedom from paying taxes. In fact, you’ll owe tax that you never had to pay as an employee. The self-employment tax (officially known as the SECA tax for Self-Employment Contributions Act tax) is the self-employed person's version of the FICA (Federal Insurance Contributions Act) tax paid by employers and employees for Social Security and Medicare, and it's due on your net earnings from self-employment.

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:

* 10.4 percent for Social Security. For 2011, this part of the tax applies to the first $106,800 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 10.4 percent part of the tax that pays for Social Security stops for the year. 

* 2.9 percent 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...