What the Form Is For

Schedule SE (Self-Employment Tax) is an IRS form that self-employed individuals attach to their Form 1040 to calculate and report the Social Security and Medicare taxes they owe on self-employment income. While traditional employees have these taxes withheld from their paychecks by employers, self-employed people—including freelancers, independent contractors, sole proprietors, and partners in partnerships—must calculate and pay these taxes themselves.

The Social Security Administration uses the information from Schedule SE to determine your eligibility for Social Security benefits and calculate your future retirement, disability, and survivor benefits. Think of it as your ticket to building Social Security credits when you don't have a traditional employer paying half your Social Security and Medicare taxes.

The form comes in two versions: a Short Schedule SE (Section A, front page) for straightforward situations, and a Long Schedule SE (Section B, back page) for more complex circumstances, such as when you received wages from employment in addition to self-employment income, or when you're using optional calculation methods. IRS.gov

When You'd Use (Late/Amended)

You must file Schedule SE with your original 2011 Form 1040 if you had net earnings from self-employment of $400 or more, or if you had church employee income of $108.28 or more (wages from a church or qualified church-controlled organization exempt from employer Social Security taxes).

Late Filing: If you missed the original April 2012 deadline for your 2011 tax return, you should file Schedule SE along with your Form 1040 as soon as possible. The IRS calculates penalties and interest from the original due date, so the sooner you file, the less you'll owe in additional charges.

Amended Returns: If you need to correct your 2011 self-employment tax, you'll file Form 1040X (Amended U.S. Individual Income Tax Return) with a corrected Schedule SE attached. Common reasons for amendments include discovering additional self-employment income you forgot to report, correcting calculation errors, or realizing you qualified for optional calculation methods that would benefit you. According to the Schedule SE instructions, you can change between the regular method and optional methods after filing by submitting an amended return. IRS.gov

Key Rules or Details for 2011

The 2011 tax year had several special rules that make it unique:

Reduced Tax Rate: The self-employment tax rate was temporarily reduced from 15.3% to 13.3% for 2011. The Social Security (OASDI) portion dropped from 12.4% to 10.4%, while the Medicare portion remained at 2.9%. This was a one-year payroll tax holiday designed to stimulate the economy.

Earnings Cap: The maximum amount of self-employment income subject to Social Security tax was $106,800 in 2011. Income above this amount was still subject to the 2.9% Medicare tax with no cap.

Filing Threshold: You must file Schedule SE if your net self-employment earnings were $400 or more, or church employee income was $108.28 or more.

Deduction Changes: For 2011, the self-employment tax deduction (which you claim on Form 1040, line 27) was revised to reflect an employer's equivalent portion. For amounts up to $14,204.40, you multiply the SE tax by 57.51%; for amounts over that threshold, you multiply by 50% and add $1,067. You could no longer reduce net self-employment income by your self-employed health insurance deduction.

Optional Methods: If you had low income or a loss from self-employment, you might benefit from the farm optional method or nonfarm optional method to increase your net earnings for Social Security credit purposes—even though this could increase your SE tax. IRS.gov

Step-by-Step (High Level)

Step 1: Determine Which Section to Use

Use the flowchart on page 1 of Schedule SE. Most people with straightforward self-employment income can use Short Schedule SE (Section A). Use Long Schedule SE (Section B) if you had wages subject to Social Security tax, are using optional methods, received tips you didn't report, had church employee income, or are a minister with special circumstances.

Step 2: Calculate Net Earnings

Report your net farm profit or loss from Schedule F (line 1a) and net business profit or loss from Schedule C or C-EZ (line 2). Include any Conservation Reserve Program payments if you were receiving Social Security retirement or disability benefits (line 1b). Also include partnership income from Schedule K-1.

Step 3: Apply the Multiplier

Multiply your combined net earnings (line 3) by 92.35% (0.9235) to arrive at your self-employment earnings subject to tax (line 4). This adjustment accounts for the employer portion of the tax that employees don't pay on their own.

Step 4: Calculate the Tax

For Short Schedule SE: If line 4 is $106,800 or less, multiply by 13.3% (the reduced 2011 rate). If more than $106,800, multiply by 2.9% and add $11,107.20.

For Long Schedule SE: The calculation is more complex and separates the Social Security and Medicare portions, accounting for any wages you earned as an employee.

Step 5: Calculate Your Deduction

The employer-equivalent deduction reduces your adjusted gross income. For SE tax amounts of $14,204.40 or less, multiply your SE tax by 57.51%. For amounts greater than that, multiply by 50% and add $1,067.

Step 6: Transfer the Amounts

Enter your self-employment tax on Form 1040, line 56, and your deduction on Form 1040, line 27. IRS.gov

Common Mistakes and How to Avoid Them

Mistake #1: Using the Wrong Tax Rate
Many taxpayers mistakenly use the standard 15.3% rate instead of the reduced 13.3% rate for 2011. How to avoid: Verify you're using the 2011-specific rate (10.4% for Social Security + 2.9% for Medicare = 13.3%).

Mistake #2: Forgetting to File When Income Is Under $600
Even if you didn't receive a 1099 form (typically issued for income over $600), you still must file Schedule SE if your net earnings from self-employment are $400 or more. How to avoid: Track all self-employment income regardless of whether you receive tax forms.

Mistake #3: Incorrectly Calculating Net Earnings
Some taxpayers confuse gross income with net earnings. You must first subtract business expenses on Schedule C or C-EZ before reporting the net profit on Schedule SE. How to avoid: Complete Schedule C or Schedule F first, then transfer the net profit (or loss) to Schedule SE.

Mistake #4: Missing the Deduction
Taxpayers sometimes forget to claim the employer-equivalent portion of their self-employment tax as a deduction on Form 1040, line 27. How to avoid: Complete line 6 of Schedule SE and transfer that amount to Form 1040, line 27—this reduces your adjusted gross income.

Mistake #5: Reporting Community Income Incorrectly
For married couples in community property states, self-employment income must be allocated properly. Only the spouse who performed the work includes the income on their Schedule SE. How to avoid: Review the community income rules in the Schedule SE instructions or consult IRS Publication 555.

Mistake #6: Using the Wrong Schedule SE Version
Using Short Schedule SE when you should use Long Schedule SE (or vice versa) leads to incorrect tax calculations. How to avoid: Carefully follow the flowchart on page 1 to determine which section applies to your situation.

What Happens After You File

Once you file Schedule SE with your Form 1040, several things occur:

IRS Processing: The IRS processes your self-employment tax calculation and includes it in your total tax liability for 2011. If you owe additional tax, it's added to your balance due. If you already paid enough through estimated taxes, it reduces your refund or eliminates additional amounts owed.

Social Security Credits: The Social Security Administration records your self-employment earnings, which count toward the 40 credits (roughly 10 years of work) needed to qualify for Social Security retirement benefits. Your 2011 earnings also factor into your future benefit calculations—higher lifetime earnings generally mean higher monthly benefits.

Payment Expectations: If you owe self-employment tax and didn't pay enough through quarterly estimated tax payments during 2011, you'll need to pay the balance by the return's due date (April 17, 2012, for most taxpayers). Underpayment may trigger penalties and interest.

Future Estimated Taxes: Based on your 2011 self-employment income, you should make quarterly estimated tax payments for 2012 (and subsequent years if you continue self-employment) using Form 1040-ES to avoid underpayment penalties.

Refund Timeline: If you're due a refund, the IRS typically processes returns and issues refunds within 21 days of e-filing (or 6-8 weeks for paper returns). Your self-employment tax is factored into this calculation. IRS.gov

FAQs

1. What if I had both self-employment income and W-2 wages in 2011?

You must use Long Schedule SE (Section B). Your W-2 wages count toward the $106,800 Social Security earnings cap, which may reduce the amount of self-employment income subject to the 10.4% Social Security portion. You'll still pay the 2.9% Medicare tax on all self-employment earnings regardless of your W-2 wages.

2. Can I use the optional methods to increase my Social Security credits?

Yes, if your self-employment income was low or you had a loss, the farm optional method or nonfarm optional method might help you earn Social Security credits. However, this increases your SE tax. The nonfarm optional method can only be used five times in your lifetime and requires you had net earnings from self-employment of at least $400 in two of the three preceding years.

3. Do I owe self-employment tax if my business lost money in 2011?

Generally, no—you don't owe SE tax on a loss. However, you might still want to file Schedule SE if you had Conservation Reserve Program payments (reported on line 1b) or if using an optional method would give you Social Security credits.

4. What's the difference between self-employment tax and income tax?

Self-employment tax specifically covers Social Security and Medicare taxes (13.3% for 2011). Income tax is calculated separately on your Form 1040 based on your total income, deductions, and filing status. Self-employed individuals pay both—but you can deduct the employer-equivalent portion of your SE tax when calculating income tax.

5. I'm a minister—do I have to pay self-employment tax?

In most cases, yes. Ministers must pay SE tax on salaries and income for ministerial services unless you filed Form 4361 and received IRS approval for exemption based on religious objections. Church employee income (if you worked for a church in a non-ministerial role) is subject to SE tax if the church has a certificate exempting it from employer Social Security taxes.

6. Can I pay my 2011 self-employment tax in installments?

If you can't pay the full amount by the filing deadline, you can request an installment agreement with the IRS. File your return on time to avoid late-filing penalties, then contact the IRS to set up a payment plan. Interest and late-payment penalties will accrue until you pay in full.

7. What happens if I discover I should have used Schedule SE after already filing my 2011 return?

File Form 1040X (Amended U.S. Individual Income Tax Return) with a completed Schedule SE attached. The IRS will assess the additional self-employment tax plus interest from the original due date. Filing the amendment as soon as you discover the error minimizes penalties and interest charges. IRS.gov

Sources

All information is sourced from official IRS publications for tax year 2011:

• 2011 Instructions for Schedule SE (Form 1040)
• 2011 Schedule SE (Form 1040)