What the Form Is For

Schedule SE (Form 1040), Self-Employment Tax, is the form self-employed individuals use to calculate and report the Social Security and Medicare taxes they owe on their business earnings. If you work for yourself—whether as a freelancer, independent contractor, small business owner, or farmer—you don't have an employer withholding these taxes from your paycheck. Instead, you're responsible for paying both the employee and employer portions yourself through what's called "self-employment tax."

The Social Security Administration uses the information from your Schedule SE to calculate your future Social Security and Medicare benefits. This means filing Schedule SE isn't just about paying taxes—it's also about building credits toward your retirement and disability benefits. You must pay this tax regardless of your age, even if you're already receiving Social Security or Medicare benefits.

Schedule SE comes in two versions: the Short Schedule (Section A on the front) for simpler situations, and the Long Schedule (Section B on the back) for more complex scenarios. The form includes a helpful flowchart to guide you toward the right version.

When You'd Use It (Including Late and Amended Returns)

Original Filing

You must file Schedule SE with your 2014 Form 1040 if either of these situations applies:

• Your net earnings from self-employment were $400 or more, or
• You had church employee income of $108.28 or more

Schedule SE should be filed along with your regular income tax return by the normal deadline (April 15, 2015, for most 2014 tax returns).

Late Filing

If you missed the deadline and need to file Schedule SE late, you should file it as soon as possible along with your late Form 1040. The IRS assesses penalties for late filing and late payment, which accumulate over time. Even if you can't pay the full amount immediately, filing late is better than not filing at all, as the failure-to-file penalty is significantly steeper than the failure-to-pay penalty.

Amended Returns

You can change the method used to calculate your self-employment tax after filing your original return. To do this, file Form 1040X (Amended U.S. Individual Income Tax Return) with a corrected Schedule SE attached. Generally, you have three years from the date you filed your original return or two years from the date you paid the tax (whichever is later) to file an amendment and claim a refund. You might amend to correct errors, use optional calculation methods that benefit you, or report self-employment income you initially overlooked.

Key Rules or Details for 2014

• Tax Rate: The self-employment tax rate for 2014 was 15.3% of your net self-employment earnings, consisting of:
  • 12.4% for Social Security
  • 2.9% for Medicare
• Income Cap: For 2014, only the first $117,000 of your combined wages and self-employment income was subject to the Social Security portion (12.4%). There's no cap on the Medicare portion—you pay 2.9% on all your self-employment earnings.
• Deduction Benefit: You can deduct one-half of your self-employment tax when calculating your adjusted gross income on Form 1040. This helps offset the burden of paying both the employee and employer portions.
• Minimum Thresholds: You're required to file if your net self-employment earnings are $400 or more. For church employees specifically, the threshold is $108.28 or more.
• Additional Medicare Tax: High earners need to be aware that an additional 0.9% Medicare tax may apply to self-employment income exceeding certain thresholds ($200,000 for single filers, $250,000 for married filing jointly, $125,000 for married filing separately). This is calculated on Form 8959.

Step-by-Step (High Level)

Step 1: Gather Your Income Information

Collect all forms showing your self-employment income, including Schedule C (business profit or loss), Schedule C-EZ (simplified version), Schedule F (farm income), and Schedule K-1 from partnerships. You need to know your net profit or loss from self-employment activities.

Step 2: Determine Which Schedule to Use

Use the flowchart on Schedule SE to determine whether you can use the Short Schedule (simpler) or must use the Long Schedule. Most straightforward self-employment situations qualify for the Short Schedule. You'll need the Long Schedule if you have church employee income, want to use optional methods, received Conservation Reserve Program payments while on Social Security, or have other special circumstances.

Step 3: Calculate Net Earnings

On the Short Schedule, enter your net farm profit or loss (line 1a), certain taxable Conservation Reserve payments (line 1b), and net nonfarm profit or loss (line 2). Line 3 combines these amounts. Multiply line 3 by 92.35% (0.9235) to get your net earnings subject to self-employment tax—this reflects the fact that employees don't pay Social Security and Medicare taxes on the employer's matching contribution.

Step 4: Calculate Your Tax

Multiply your net earnings (up to $117,000 for the Social Security portion) by the appropriate tax rates. For amounts under $117,000, you multiply by 15.3%. If you earned more than $117,000, you'll calculate Social Security tax (12.4%) on only the first $117,000, then add Medicare tax (2.9%) on your full earnings.

Step 5: Transfer to Form 1040

Transfer the calculated self-employment tax to Form 1040, line 57 (or Form 1040NR, line 55 for nonresident aliens). Also calculate your deduction (half of your self-employment tax) and enter it on Form 1040, line 27.

Step 6: Consider Optional Methods

The Long Schedule offers farm and nonfarm optional methods that might benefit you if you had a loss or small income. These methods can help you gain Social Security coverage credits or qualify for certain tax credits like the Earned Income Credit. You can change methods by filing an amended return.

Common Mistakes and How to Avoid Them

Mistake #1: Failing to File When Required

Many people mistakenly believe that if they owe little or no income tax, they don't need to file Schedule SE. Remember: the $400 threshold is for net self-employment earnings, not taxable income. If you made $400 or more from self-employment, file Schedule SE even if you're in a low tax bracket.
How to avoid: Review all income sources, including side gigs, freelance work, and cash payments. If your self-employment net profit totaled $400 or more, file Schedule SE.

Mistake #2: Forgetting the 92.35% Multiplier

Some taxpayers incorrectly multiply their full net profit by 15.3% instead of first reducing it by 92.35%. This calculation error can result in overpaying or filing incorrectly.
How to avoid: Follow Schedule SE line-by-line carefully. Line 4 (Short Schedule) or line 4c (Long Schedule) automatically accounts for this by multiplying your line 3 amount by 0.9235.

Mistake #3: Confusing Gross Income with Net Earnings

The self-employment tax applies to your net earnings (profit after expenses), not your gross receipts. Including gross income without subtracting legitimate business expenses dramatically overstates your tax liability.
How to avoid: Complete Schedule C, C-EZ, or F first to properly calculate your net profit, then transfer that net figure to Schedule SE.

Mistake #4: Missing the Income Cap

For 2014, Social Security tax only applies to the first $117,000 of combined earnings. Taxpayers with both W-2 wages and self-employment income sometimes calculate this incorrectly.
How to avoid: If you had both wages and self-employment income, use the Long Schedule SE, which has lines specifically designed to account for wages already subject to Social Security tax (line 8a).

Mistake #5: Incorrectly Reporting Partnership Income

Partnership income from Schedule K-1 should be reported on Schedule SE, but many taxpayers either omit it or include amounts that shouldn't be subject to self-employment tax (like limited partner distributions that aren't guaranteed payments).
How to avoid: Check Schedule K-1, box 14, code A for the self-employment earnings amount. General partners include this; limited partners include only guaranteed payments for services.

Mistake #6: Not Using Beneficial Optional Methods

The optional methods can provide Social Security coverage credits or increase certain tax credits, yet many eligible taxpayers overlook them because the Long Schedule seems complicated.
How to avoid: Review the optional methods section. If you had low or negative net earnings, these methods might help you qualify for benefits or credits. You can amend to use these methods later if you discover they would have benefited you.

Mistake #7: Forgetting the Deduction on Form 1040

Half of your self-employment tax is deductible, reducing your adjusted gross income. Many people calculate and pay the tax but forget to claim this valuable deduction on Form 1040, line 27.
How to avoid: After completing Schedule SE, immediately go to Form 1040, line 27, and enter one-half of your self-employment tax. This is calculated for you on Schedule SE, line 6 (either section).

What Happens After You File

IRS Processing

After you file Schedule SE with your Form 1040, the IRS processes your return and records your self-employment tax payment. This typically takes 6-8 weeks for paper returns or 3 weeks for e-filed returns.

Social Security Credits

The Social Security Administration receives your self-employment income information from the IRS. Your earnings are credited to your Social Security record, building toward your eligibility for retirement, disability, and survivor benefits. For 2014, you earned one Social Security credit for each $1,200 of covered earnings, up to a maximum of four credits per year.

Payment Obligations

If you owe self-employment tax, you must pay it by your return's deadline. If you expect to owe $1,000 or more in taxes (including self-employment tax) for the following year, you'll need to make quarterly estimated tax payments using Form 1040-ES. Missing estimated payments can result in underpayment penalties even if you pay everything by April 15.

Potential IRS Contact

The IRS may send you a notice if they find computational errors, need additional information, or identify discrepancies between your Schedule SE and other forms (like Schedule C or K-1s). Respond promptly to any IRS correspondence with documentation supporting your figures.

Refund or Additional Tax

Self-employment tax increases your total tax liability. If you had substantial withholding from W-2 income or made estimated payments that exceed your total tax (including self-employment tax), you might still receive a refund. If not, you'll need to pay the balance due.

Future Planning

Your 2014 Schedule SE experience helps you plan for future tax years. If you paid significant self-employment tax, consider increasing estimated tax payments, adjusting withholding from any W-2 jobs, or making quarterly payments to avoid a large bill next April. You might also explore retirement contributions to tax-advantaged accounts like SEP-IRAs or Solo 401(k)s, which reduce your net self-employment income.

FAQs

Q1: Do I need to file Schedule SE if I also have a regular W-2 job?

Yes, if your self-employment net earnings are $400 or more, you must file Schedule SE regardless of whether you also have W-2 income. You'll use the Long Schedule SE, which has specific lines (8a and 8b) to account for Social Security and Medicare taxes already paid through wage withholding. This ensures you don't pay Social Security tax on earnings above the $117,000 cap for 2014.

Q2: Can I deduct my health insurance premiums from self-employment earnings before calculating the tax?

No, you cannot reduce your net profit for self-employment tax purposes by deducting health insurance premiums. You calculate self-employment tax on your full net business profit. However, you can deduct self-employed health insurance premiums on Form 1040, line 29, as an adjustment to income, which reduces your income tax (but not your self-employment tax).

Q3: What if my business lost money in 2014—do I still file Schedule SE?

Generally, if you had a net loss from self-employment, you don't owe self-employment tax and don't need to file Schedule SE. However, you might benefit from filing Schedule SE using one of the optional methods in Part II of the Long Schedule. These methods can give you Social Security coverage credits even with a loss, helping you qualify for future benefits. You might also use optional methods to increase your earned income for purposes of the Earned Income Credit or child tax credit.

Q4: I'm a limited partner in a business—how do I report that income?

Limited partners have special rules. Generally, you only include guaranteed payments for services you actually rendered to the partnership in your self-employment earnings. Your share of the partnership's general profits shown on Schedule K-1 is investment income, not subject to self-employment tax for limited partners. Report guaranteed payments on Schedule SE, line 2, but regular distributive shares go on Schedule E for income tax purposes only.

Q5: My spouse and I both have self-employment income—do we file one Schedule SE?

No, each spouse with self-employment income must file a separate Schedule SE. If one spouse can use the Short Schedule and the other needs the Long Schedule, you can use the same form—one spouse completes the front (Short Schedule) and the other completes the back (Long Schedule). Each spouse's self-employment tax is calculated separately and both amounts are added together on Form 1040, line 57.

Q6: What are optional methods and when should I use them?

Optional methods are alternative calculations that might benefit you if you had low earnings or losses. The farm optional method lets you report two-thirds of gross farm income (up to $4,800) as net earnings, even with a loss. The nonfarm optional method works similarly. These methods can help you earn Social Security credits toward future benefits, increase your Earned Income Credit, or qualify for other credits. Use them when your actual net earnings are low or negative, but be aware they might increase your self-employment tax.

Q7: I received a 1099-MISC for $3,000 but didn't file Schedule SE because it's below the income tax filing threshold—is that correct?

No, that's incorrect. The $400 threshold for Schedule SE is separate from income tax filing requirements. If you had net self-employment earnings of $400 or more, you must file Schedule SE even if your total income is below the threshold for filing a regular income tax return. In your case, if your net profit (after deducting legitimate business expenses) was $400 or more, you need to file both Form 1040 and Schedule SE.

This summary is based on official IRS guidance from the 2014 Instructions for Schedule SE (Form 1040) and related IRS publications. For complete details, consult the official IRS instructions or a tax professional.