A Simple Guide for the Self-Employed

If you work for yourself—whether as a freelancer, independent contractor, small business owner, or consultant—you need to understand Schedule SE. This form is how self-employed individuals pay their Social Security and Medicare taxes, which employees normally have automatically withheld from their paychecks. Think of it as your contribution to the same benefits system that traditional employees support through payroll deductions. IRS Schedule SE Information

What the Form Is For

Schedule SE (Self-Employment) is the form you attach to your regular Form 1040 tax return to calculate and report self-employment tax. This tax covers your Social Security and Medicare contributions—the same programs that employees pay into through FICA (Federal Insurance Contributions Act) taxes withheld from their paychecks. When you're self-employed, you're essentially both the employee and the employer, which means you pay both portions of these taxes.

The Social Security Administration uses the information from your Schedule SE to calculate your future retirement, disability, and survivor benefits. Every quarter you earn credits toward these benefits by paying self-employment tax, just as traditional employees do. This matters whether you're 25 or 65, already receiving benefits, or decades away from retirement. The tax applies regardless of your age or current benefit status. IRS Instructions for Schedule SE 2019

For 2019, the self-employment tax rate was 15.3% of your net earnings. This breaks down to 12.4% for Social Security and 2.9% for Medicare. However, you only pay this tax on 92.35% of your net self-employment income (the IRS gives you this reduction to approximate the employer portion that wouldn't be subject to tax).

When You’d Use It (Late/Amended Filings)

You must file Schedule SE if your net earnings from self-employment were $400 or more during 2019, or if you had church employee income of $108.28 or more. Most people file Schedule SE with their original tax return by the standard deadline (April 15, 2020, for the 2019 tax year).

Late Filing

If you missed the original deadline and need to file a late return for 2019, you'll include Schedule SE with your Form 1040. There's no separate deadline for Schedule SE—it follows your main tax return deadline. Keep in mind that filing late may result in penalties and interest on any unpaid taxes, though these penalties can sometimes be reduced or eliminated if you have reasonable cause for the delay.

Amended Returns

If you discover an error in your self-employment income after filing, you'll need to file Form 1040-X (Amended U.S. Individual Income Tax Return) along with a corrected Schedule SE. Common reasons for amending include discovering additional income you forgot to report, finding eligible deductions you missed, or correcting mathematical errors in your original calculation. You generally have three years from the original filing deadline to file an amended return. The IRS notes that you can even change from the regular method to optional methods of calculating your self-employment tax (or vice versa) by filing an amended return.

Key Rules or Details for 2019

Earnings Threshold: You must file Schedule SE if your net self-employment earnings were $400 or more. "Net earnings" means your business income minus your business expenses—essentially your profit.

Maximum Income Subject to Social Security Tax: For 2019, only the first $132,900 of your combined wages and self-employment earnings was subject to the Social Security portion (12.4%) of the tax. However, all of your earnings are subject to the Medicare portion (2.9%), with no maximum limit. IRS 2019 Schedule SE Form

Additional Medicare Tax: If your total income exceeds certain thresholds ($250,000 for married filing jointly, $200,000 for single filers, or $125,000 for married filing separately), you'll owe an additional 0.9% Medicare tax on the excess. This is calculated separately on Form 8959 and isn't part of Schedule SE itself.

Tax Deduction Benefit: Here's a silver lining—you can deduct half of your self-employment tax when calculating your adjusted gross income on Form 1040. This deduction reduces your income tax (though not your self-employment tax itself), partially offsetting the burden of paying both the employee and employer portions.

Two Form Versions: Schedule SE comes in two versions—Short (Section A) and Long (Section B). Most self-employed people can use the simpler Short Schedule SE. You'll need the Long version if you had wages of $132,900 or more, church employee income, or want to use optional methods of calculating your tax.

Step-by-Step (High Level)

Step 1: Gather Your Information

You'll need your net profit or loss from Schedule C (business income) or Schedule F (farm income), or your share of partnership income from Schedule K-1. This is your net self-employment income—the profit after deducting business expenses.

Step 2: Determine Which Section to Use

Follow the flowchart at the top of Schedule SE. Most people with straightforward self-employment income can use Short Schedule SE (Section A). You'll need Long Schedule SE (Section B) if you earned wages of $132,900 or more, had certain types of specialized income, or want to use optional calculation methods.

Step 3: Calculate Net Earnings

Enter your net business profit or loss on the appropriate line. If you have multiple self-employment activities, combine all the profits and losses. The form will multiply this by 92.35% (0.9235) to determine your earnings subject to self-employment tax.

Step 4: Calculate the Tax

The form walks you through multiplying your net earnings by the self-employment tax rate (15.3%). If your income exceeds the Social Security wage base of $132,900, the form automatically adjusts so you only pay the Social Security portion on the first $132,900.

Step 5: Transfer to Form 1040

Enter your self-employment tax from Schedule SE on Schedule 2 (Form 1040), line 4, and then calculate the deduction for half of your self-employment tax on Schedule 1, line 14.

Step 6: Keep Your Records

Attach Schedule SE to your Form 1040 when you file. Keep copies of all supporting documentation—receipts, invoices, bank statements—for at least three years.

Common Mistakes and How to Avoid Them

Mistake #1: Forgetting to File When Income Is Below $400

Even if your net earnings are below the $400 threshold, you might benefit from filing Schedule SE anyway. Using "optional methods" can help you earn Social Security credits toward future benefits or increase your earned income credit.

Mistake #2: Including Gross Income Instead of Net Profit

Schedule SE requires your net earnings (profit), not your gross income. You must first subtract your business expenses on Schedule C or F, then transfer the bottom-line profit to Schedule SE. Don't skip the expense calculation—it makes a huge difference in your tax liability.

Mistake #3: Reporting All Partnership Income

Limited partners should generally only include guaranteed payments for services rendered, not their entire share of partnership income. The rules differ for general partners versus limited partners, so check your Schedule K-1 instructions carefully.

Mistake #4: Forgetting the Half-Tax Deduction

Many self-employed people correctly calculate their self-employment tax but forget to claim the deduction for half of it on Schedule 1 of Form 1040. This is free money you're entitled to—don't leave it on the table.

Mistake #5: Combining Multiple Businesses Incorrectly

If you have more than one self-employment activity, combine all profits and losses on one Schedule SE. Don't file separate forms for each business. A loss in one business reduces the profit from another when calculating your total self-employment tax.

Mistake #6: Missing the Social Security Wage Base Adjustment

If you also have W-2 wages, those count toward the $132,900 Social Security wage base. You might owe Social Security tax on less of your self-employment income than you think. Use Long Schedule SE to properly account for your W-2 wages.

What Happens After You File

IRS Processing

Once you file your Form 1040 with Schedule SE attached, the IRS processes your return and assesses your self-employment tax along with your income tax. If you owe money, you'll need to pay by the filing deadline to avoid interest and penalties.

Social Security Records Update

The IRS forwards your Schedule SE information to the Social Security Administration, which posts the earnings to your Social Security record. These earnings determine your eligibility for benefits and the amount you'll receive in retirement, disability, or survivor benefits. You can verify your earnings record by creating an account at SSA.gov and reviewing your Social Security Statement. IRS Self-Employment Tax Guide

Future Benefit Calculations

For 2019, you earned one Social Security credit for every $1,360 in self-employment earnings, up to a maximum of four credits per year (requiring $5,440 in earnings). You need 40 credits (10 years of work) to qualify for retirement benefits. Higher earnings generally mean higher future benefits, though Social Security uses a complex formula based on your highest 35 years of earnings.

Quarterly Estimated Tax Implications

Self-employment tax isn't withheld throughout the year like wages. If you owe $1,000 or more in combined income and self-employment tax, you're required to make quarterly estimated tax payments for future years. Your 2019 Schedule SE helps you estimate what you'll owe in 2020 and beyond.

Audit Considerations

Schedule SE itself isn't commonly audited, but the income sources behind it (Schedule C or F) are. Keep detailed records of all income and expenses for at least three years. The IRS has three years from your filing date to audit your return in most cases, but this extends to six years if you substantially underreported income.

FAQs

Q1: What if my business lost money—do I still need to file Schedule SE?

Generally, if you have a net loss from self-employment, you don't owe self-employment tax and don't need to file Schedule SE. However, you might still want to file and use the optional methods to earn Social Security credits toward future benefits. This can be especially valuable if you had little other income that year or want to qualify for certain tax credits.

Q2: I'm already receiving Social Security benefits. Do I still have to pay self-employment tax?

Yes. Self-employment tax applies regardless of your age or whether you're currently receiving Social Security or Medicare benefits. There's no exemption for retirees who continue to work for themselves. However, your continued earnings may increase your future benefit amount if they're higher than earnings from earlier years in your work history.

Q3: Can I deduct my health insurance premiums from self-employment tax?

No, but close. You cannot deduct health insurance premiums before calculating your self-employment tax—it's based on your net business profit before the health insurance deduction. However, after calculating your self-employment tax, you can deduct health insurance premiums on Schedule 1 of Form 1040 to reduce your income tax. The optional methods for calculating net earnings from self-employment can be used to figure your self-employed health insurance deduction.

Q4: What if I have both W-2 wages and self-employment income?

You'll file both a regular Form 1040 (reporting your W-2 wages) and Schedule SE (reporting your self-employment income). The good news: if your W-2 wages already maxed out the Social Security wage base ($132,900 for 2019), you won't owe the Social Security portion of self-employment tax—only the Medicare portion. Use Long Schedule SE to properly account for your wages.

Q5: What's the difference between Schedule C and Schedule SE?

Schedule C is where you calculate your business profit or loss by listing all your business income and expenses. Schedule SE is where you calculate the self-employment tax on that profit. Think of Schedule C as "how much did I make?" and Schedule SE as "what do I owe in Social Security and Medicare taxes?" You'll always complete Schedule C first, then transfer the net profit to Schedule SE.

Q6: Are there any exemptions from self-employment tax?

Very few. Members of certain religious sects who are conscientiously opposed to insurance can apply for exemption using Form 4029. Some ministers and religious workers can file Form 4361 for exemption. If you're a U.S. citizen working abroad in a country with a social security agreement with the U.S., you might be exempt. But for the vast majority of self-employed people, there's no way around self-employment tax—it's the price of building your own business and earning Social Security benefits.

Q7: What are the "optional methods" mentioned in the instructions?

The optional methods (Farm Optional Method and Nonfarm Optional Method) let you report higher or lower net earnings than you actually had. This can help you earn Social Security credits even in a low-income or loss year, or increase certain tax credits. The nonfarm optional method can only be used five times in your lifetime and requires that you were regularly self-employed (actual net earnings of $400+ in two of the previous three years). These methods are found in Part II of Long Schedule SE.

Sources: All information in this guide is based on official IRS publications including the 2019 Instructions for Schedule SE, About Schedule SE (Form 1040), and Self-Employment Tax guidance from IRS.gov.