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 paid by people who work for themselves. If you're self-employed, you wear two hats: you're both the employee and the employer. This means you must pay both the employee's share and the employer's share of Social Security and Medicare taxes, which together total 15.3% of your net earnings.

The Social Security Administration uses the information from your Schedule SE to calculate your future Social Security retirement and disability benefits. Even if you're already receiving Social Security or Medicare benefits, you still must pay SE tax if you continue earning self-employment income. This form attaches to your main tax return (Form 1040) and ensures you're contributing to the social safety net programs while building your own benefit credits IRS.

Schedule SE comes in two versions: the Short Schedule SE (Section A on page 1) and the Long Schedule SE (Section B on page 2). Most taxpayers can use the simpler Short Schedule, but certain situations—such as receiving wages subject to Social Security tax, having church employee income, using optional calculation methods, or receiving unreported tips—require the Long Schedule.

When You'd Use It (On Time, Late, or Amended)

Filing on Time

You must file Schedule SE with your 2013 Form 1040 if either of these conditions apply: (1) your net self-employment earnings are $400 or more, or (2) you had church employee income of $108.28 or more. The regular deadline for 2013 tax returns was April 15, 2014 IRS.

Filing Late

If you missed the original deadline and haven't yet filed your 2013 return, you should file Schedule SE along with your Form 1040 as soon as possible. The IRS charges penalties for late filing and late payment. However, if you're due a refund, there's no penalty for filing late—though you must file within three years of the original deadline to claim that refund.

Filing an Amended Return

If you discover errors after filing your 2013 return—such as forgetting to include self-employment income, miscalculating your SE tax, or deciding to use the optional calculation methods—you can change your Schedule SE by filing Form 1040X (Amended U.S. Individual Income Tax Return). The IRS instructions specifically note you can switch between regular and optional calculation methods using Form 1040X IRS. Generally, you have three years from the original filing deadline to amend and claim a refund.

Key Rules and Thresholds for 2013

Tax Rate Structure

The 2013 self-employment tax rate was 15.3% total, consisting of 12.4% for Social Security and 2.9% for Medicare. However, you don't pay SE tax on all your earnings—you multiply your net self-employment income by 92.35% first. This adjustment accounts for the fact that regular employees don't pay Social Security and Medicare taxes on the employer's portion of their payroll taxes IRS.

Social Security Wage Base Limit

For 2013, only the first $113,700 of combined wages and self-employment earnings were subject to the 12.4% Social Security portion of SE tax. Income above this threshold was still subject to the 2.9% Medicare tax, which has no cap IRS.

New Additional Medicare Tax

Starting in 2013, a new 0.9% Additional Medicare Tax applied to self-employment income exceeding certain thresholds: $250,000 for married filing jointly, $125,000 for married filing separately, and $200,000 for all other filers. This additional tax is calculated on Form 8959, not on Schedule SE itself IRS.

Minimum Filing Threshold

You must file Schedule SE if your net self-employment earnings are $400 or more, or if you have church employee income of $108.28 or more. Even small amounts of self-employment income can trigger this requirement.

Deduction for Half of SE Tax

The good news is that you can deduct one-half (50%) of your self-employment tax when calculating your adjusted gross income on Form 1040, line 27. This helps offset the burden of paying both the employee and employer portions of these taxes IRS.

Step-by-Step (High Level)

Step 1: Determine Your Net Earnings

Calculate your net profit or loss from your self-employment activities using Schedule C (for business income), Schedule C-EZ (simplified business income), or Schedule F (for farming). If you're a partner in a partnership, use the self-employment income shown on your Schedule K-1 (Form 1065).

Step 2: Choose the Right Schedule

Use the flowchart on page 1 of Schedule SE to determine whether you can use the Short Schedule SE or must use the Long Schedule SE. Most people with straightforward self-employment income and no wages can use the simpler Short Schedule.

Step 3: Calculate Your Net Earnings Subject to SE Tax

Combine your farm income, Conservation Reserve Program payments (if applicable), and non-farm business income. Multiply this total by 92.35% (0.9235) to arrive at your net earnings subject to self-employment tax IRS.

Step 4: Apply the Tax Rates

For the Short Schedule, if your net earnings are $113,700 or less, multiply by 15.3% to get your SE tax. If your net earnings exceed $113,700, the calculation is more complex: multiply your total net earnings by 2.9% (Medicare only), then add $14,098.80 (the maximum Social Security tax for 2013) IRS. The Long Schedule walks you through this calculation step-by-step.

Step 5: Calculate Your Deduction

Multiply your total SE tax by 50% (0.50). This is the amount you can deduct on Form 1040, line 27 as an adjustment to income IRS.

Step 6: Transfer to Form 1040

Enter your total self-employment tax on Form 1040, line 56, and your deduction on Form 1040, line 27. Attach the completed Schedule SE to your tax return.

Optional Methods

If your earnings are very low, you might benefit from using the Farm Optional Method or Nonfarm Optional Method. These can help you gain Social Security coverage credits even with minimal income, or qualify for certain tax credits like the Earned Income Credit. These optional methods are calculated in Part II of the Long Schedule SE IRS.

Common Mistakes and How to Avoid Them

Mistake #1: Not Filing Because Income Seems Too Small

Many self-employed people assume they don't need to file if they earned less than the standard deduction amount. However, the $400 threshold for Schedule SE is much lower than income tax filing thresholds. How to avoid: File Schedule SE if your net self-employment earnings are $400 or more, regardless of whether you owe income tax IRS.

Mistake #2: Forgetting the 92.35% Adjustment

Some taxpayers incorrectly apply the 15.3% tax rate to their total net profit instead of first multiplying by 92.35%. This overstates their SE tax liability. How to avoid: Always follow the line-by-line instructions on Schedule SE, which automatically builds in this adjustment on line 4.

Mistake #3: Including the Wrong Income

Not all income reported on tax forms is subject to SE tax. For example, if you're a "statutory employee" (box 13 on Form W-2 is checked), your income is not subject to SE tax. Rental real estate income generally isn't subject to SE tax unless you materially participated in farming or provided substantial services to tenants. How to avoid: Review the detailed lists in the IRS instructions about what is and isn't included in net earnings from self-employment IRS.

Mistake #4: Joint Return Confusion

When both spouses have self-employment income, each must file a separate Schedule SE—you can't combine your self-employment earnings on one form. How to avoid: If both spouses are self-employed, prepare two Schedule SE forms, though you can use the front and back of the same sheet if one qualifies for Short Schedule and the other needs Long Schedule IRS.

Mistake #5: Overlooking the Social Security Wage Base

If you had both W-2 wages and self-employment income totaling more than $113,700, you need to use the Long Schedule SE to properly calculate reduced Social Security tax on the self-employment portion. How to avoid: If you had any W-2 wages in 2013, use the Long Schedule SE and carefully complete lines 7 through 9 to account for Social Security taxes already paid on wages IRS.

Mistake #6: Forgetting to Claim the Deduction

The deduction for one-half of SE tax can save significant money, but it's only valuable if you remember to claim it on Form 1040, line 27. How to avoid: Always complete line 6 of Schedule SE and transfer that amount to your Form 1040.

Mistake #7: Not Considering Optional Methods

The Farm and Nonfarm Optional Methods can sometimes benefit taxpayers with low income, losses, or those needing Social Security coverage credits. How to avoid: Review Part II of the Long Schedule instructions to see if optional methods might help you qualify for the Earned Income Credit, Additional Child Tax Credit, or other benefits IRS.

What Happens After You File

IRS Processing

The IRS processes your Schedule SE along with your Form 1040. The self-employment tax you calculated is added to your total tax liability for the year. If you had withholding from other jobs or made estimated tax payments, those credits are applied against your total tax (including SE tax). You'll either owe additional money, receive a refund, or break even.

Social Security Credits

The Social Security Administration receives your Schedule SE information from the IRS and posts it to your Social Security earnings record. Self-employment earnings count toward the credits needed to qualify for Social Security retirement and disability benefits IRS.

Future Tax Planning

The SE tax you paid in 2013 affects your 2014 estimated tax requirements. If you expect similar self-employment income in future years, you should make quarterly estimated tax payments using Form 1040-ES to avoid underpayment penalties. Your 2013 SE tax amount helps you estimate what to pay for 2014.

Audit Possibilities

Schedule SE is part of your tax return and is subject to the same statute of limitations as the rest of your return. The IRS may examine your Schedule SE if your self-employment income appears inconsistent or if there are mathematical errors.

Refund Timeline

If your withholding and estimated payments exceeded your total tax including SE tax, the IRS processes refunds according to standard timelines. Interest accrues on delayed refunds.

FAQs

1. Do I need to file Schedule SE if I only earned $500 from freelancing?

Yes. If your net self-employment earnings are $400 or more, you must file Schedule SE and pay self-employment tax, even if you don't owe income tax. This ensures you receive Social Security credits for your work IRS.

2. Can I avoid self-employment tax by forming an LLC or corporation?

It depends. For 2013, simply forming an LLC doesn't exempt you from SE tax if the LLC is taxed as a sole proprietorship or partnership. Different business structures have different tax treatments, and the IRS has specific rules about employment taxes for various entity types.

3. I received a 1099-MISC for $5,000 but spent $4,000 on business expenses. What's my net earnings?

Your net earnings would be $1,000 ($5,000 minus $4,000), which you'd report on Schedule C or C-EZ. Since this exceeds $400, you'd file Schedule SE to calculate SE tax on this amount. Remember that you'd multiply the $1,000 by 92.35% when calculating actual SE tax, resulting in $924 subject to the 15.3% rate.

4. What if I had a loss from self-employment in 2013?

If you had a net loss, you generally don't owe SE tax. However, you might still want to file Schedule SE using the optional methods if they would give you Social Security coverage credits or help you qualify for refundable tax credits like the Earned Income Credit. The optional methods can report income even when you had a loss IRS.

5. I work a regular job and have a side business. How does this affect my SE tax?

You must pay SE tax on your side business net earnings if they're $400 or more, regardless of your W-2 job. Use the Long Schedule SE because you have both wages and self-employment income. If your W-2 wages already reached the $113,700 Social Security maximum, you only pay the 2.9% Medicare portion on your self-employment earnings IRS.

6. Are ministers and clergy treated differently for SE tax purposes?

Yes. Ministers and members of religious orders generally must pay SE tax on their earnings, even if they're church employees. However, ministers who filed Form 4361 and received IRS approval are exempt from SE tax. Church employee income (for non-minister church workers) also has special rules and different thresholds ($108.28 minimum) IRS.

7. What's the difference between the Short and Long Schedule SE?

The Short Schedule SE (Section A) is a simplified calculation that works for most self-employed people who had no wages, didn't receive tips, and aren't using optional methods. The Long Schedule SE (Section B) is required if you had W-2 wages, church employee income, unreported tips, or want to use optional calculation methods. The Long Schedule provides a more detailed calculation that coordinates SE tax with Social Security taxes already paid on wages IRS.

Sources: All information is sourced from official IRS publications for 2013, including the Schedule SE form and instructions available at IRS.gov.