What the Form Is For

Schedule SE (Form 1040) is the IRS form used to calculate and report self-employment (SE) tax – the Social Security and Medicare taxes that self-employed individuals must pay. Unlike traditional employees who have these taxes withheld and partially covered by their employers, self-employed people must pay the entire amount themselves.

The information on Schedule SE goes directly to the Social Security Administration, which uses it to determine your future retirement and disability benefits. For 2012, this tax applied to anyone with net earnings from self-employment of $400 or more, regardless of age — even if already receiving Social Security.

Self-employment tax consists of:

• 10.4% Social Security tax on earnings up to $110,100
• 2.9% Medicare tax on all earnings (no cap)
  Combined total: 13.3% — slightly reduced from the standard 15.3% due to a temporary payroll tax cut in 2012.

When You'd Use It (Late or Amended Filings)

Attach Schedule SE to your Form 1040 or 1040NR when filing your annual return. The 2012 deadline was April 15, 2013 (or October 15, 2013 with an extension).

If you missed the deadline or found errors after filing, submit Form 1040X (Amended Return). The IRS allows you to switch between the regular method and optional methods by filing an amended return — useful if a different method helps you qualify for additional credits like the Earned Income Credit.

Late filing can result in penalties and interest and may create gaps in your Social Security earnings record, potentially lowering your future benefits. Always use the correct-year forms, available at IRS.gov.

Key Rules and Thresholds for 2012

Income Thresholds

• $400 — Minimum net earnings requiring SE tax filing
• $108.28 — Minimum church employee income subject to SE tax
• $110,100 — Maximum earnings subject to Social Security tax

Tax Rates

• 13.3% on earnings up to $110,100 (10.4% Social Security + 2.9% Medicare)
• 2.9% on all earnings above $110,100 (Medicare only)

Optional Method Limits

• $4,520 — Maximum earnings claimed using optional methods
• $6,780 — Maximum gross farm income to qualify for the farm optional method
• $4,894 — Maximum net profit to use optional methods
• 5 years — Lifetime limit for the nonfarm optional method

Key Deduction Rule

You can deduct half of your SE tax (the employer-equivalent portion) on Form 1040, line 27, to mirror the deduction available to traditional employers.

Step-by-Step: How to Complete the Form (High Level)

Step 1: Determine Which Section to Use

Most taxpayers use Section A (Short Schedule SE).
Use Section B (Long Schedule SE) if you:

• Have wages subject to Social Security
• Use optional methods
• Are a minister or church employee
• Received unreported tips

Step 2: Gather Your Income Information

Collect documents showing self-employment earnings:

• Schedule C or C-EZ (business income)
• Schedule F (farm income)
• Schedule K-1 (from partnerships)
• Form W-2 (if you also had wage income)

Step 3: Calculate Net Earnings

• Line 1a: Net farm profit or loss
• Line 1b: Conservation Reserve Program payments (if applicable)
• Line 2: Net profit from business activities
• Line 3: Combine to get total net earnings

Step 4: Apply the SE Tax Reduction

Multiply your total (line 3) by 92.35% (0.9235) on line 4.
If this result is under $400, you generally owe no SE tax.

Step 5: Calculate the Tax

• If line 4 ≤ $110,100: multiply by 13.3% (0.133)
• If > $110,100: multiply by 2.9% (0.029) and add $11,450.40

Step 6: Claim Your Deduction

Take half of your SE tax (employer-equivalent share) and enter it on Form 1040, line 27.

Step 7: Transfer to Form 1040

• Line 5 (Schedule SE total tax) → Form 1040, line 56
• Line 6 (deduction) → Form 1040, line 27

Common Mistakes and How to Avoid Them

Mistake #1: Forgetting to File When Under the Standard Income Threshold

Even if total income is below filing requirements, you must file if self-employment income ≥ $400.

Mistake #2: Incorrectly Calculating Partnership Income

General partners must include their full distributive share; limited partners only include guaranteed payments for services.

Mistake #3: Missing the Employer-Equivalent Deduction

Don’t forget to claim half your SE tax as a deduction on Form 1040, line 27.

Mistake #4: Mixing Up Community Income Rules

In community property states, the spouse who performed the work reports the self-employment income — it cannot be split.

Mistake #5: Not Considering Optional Methods

Optional methods can help you earn Social Security credits or qualify for refundable credits when earnings are low.

Mistake #6: Reporting Statutory Employee Income

Do not report statutory employee income on Schedule SE; it’s already subject to FICA withholding.

What Happens After You File

Immediate Impact

The SE tax becomes part of your total tax liability. If you made estimated payments, it affects whether you owe or receive a refund.

Social Security Credits

For 2012, one credit was earned for each $1,130 of covered earnings, up to four credits per year. These determine eligibility for future retirement, disability, and survivor benefits.

Record-Keeping

Keep your return and supporting records for at least three years, or six if substantial income was omitted.

Future Benefit Calculations

Your 2012 SE income contributes to your Social Security benefit calculation, which averages your highest 35 earning years (inflation-adjusted).

Audit Possibilities

Self-employed taxpayers face higher audit rates. Maintain detailed records for income, expenses, and business activities.

FAQs

Do I need to pay quarterly estimated taxes on my self-employment income?

Yes. If you expect to owe $1,000 or more in total tax (including SE tax), make quarterly estimated payments using Form 1040-ES by April 15, June 15, September 15, and January 15.

Can I deduct my self-employment tax as a business expense?

No. You can’t deduct SE tax on Schedule C or F, but you can deduct half as an adjustment to income on Form 1040, line 27.

What if I have both a regular job and self-employment income?

Use Long Schedule SE (Section B) to ensure you don’t exceed the Social Security wage base. Lines 7–9 coordinate your combined income.

What are the optional methods, and when should I use them?

Optional methods let you report higher or lower earnings to gain Social Security credits or qualify for refundable credits.

• Farm optional method: Two-thirds of gross farm income
• Nonfarm optional method: Two-thirds of gross nonfarm income (subject to limits)

I'm a minister – do different rules apply to me?

Yes. Ministers pay SE tax on their ministry earnings unless they filed Form 4361 for exemption. If approved, write “Exempt—Form 4361” on Form 1040, line 56.

Does rental income count as self-employment income?

Generally not. Passive rental income (Schedule E) isn’t subject to SE tax — unless you materially participate in production (e.g., farm rentals) or provide substantial services (like running a B&B).

Can I still contribute to an IRA or SEP if I only have self-employment income?

Yes. Your net self-employment earnings (after half of SE tax) qualify as compensation for IRA or SEP-IRA contributions. You can also open a solo 401(k) for higher contribution limits.

For More Information:
Visit IRS.gov for the official 2012 Schedule SE form and instructions. Additional details appear in IRS Publication 334 (Tax Guide for Small Business) and Publication 225 (Farmer’s Tax Guide).