What IRS Schedule SE (Form 1040) (2020) Is For
IRS Schedule SE (Form 1040) (2020) is used by self-employed individuals, freelancers, and small business owners to calculate and pay self-employment tax. The form determines the Social Security and Medicare taxes owed based on your net earnings from self-employment. Filing ensures that self-employed workers receive proper Social Security coverage and credit toward their future benefits, such as retirement, disability, or survivor payments.
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When You’d Use IRS Schedule SE (Form 1040) (2020)
You must file this form when reporting your self-employment income on your individual income tax return:
- Regular Filing: You are required to file Schedule SE if your net earnings from self-employment were $400 or more for the tax year, even if you already receive Social Security benefits.
- Church Employee Income: You must file this form if you earned $108.28 or more in church employee income that was not subject to FICA taxes, as this income is treated as self-employment income.
- Amended Returns: You should use Schedule SE when amending your tax return with Form 1040-X to correct calculation errors or adjust your self-employment tax liability.
- Late Filing: You must submit Schedule SE if you missed the original filing deadline and are filing late; penalties and interest may apply to unpaid self-employment taxes.
Key Rules or Details for 2020
For the 2020 tax year, the IRS implemented specific rules that self-employed individuals must follow to calculate and pay self-employment tax correctly:
- Self-Employment Tax Rate: The total self-employment tax rate was 15.3%, comprising 12.4% for Social Security tax and 2.9% for Medicare tax.
- Maximum Amount Subject to Social Security Tax: Only the first $137,700 of your net earnings from self-employment is subject to Social Security tax.
- Additional Medicare Tax: An extra 0.9% Medicare tax applied to self-employment income exceeding $200,000 for single filers or $250,000 for married individuals filing jointly.
- Filing Thresholds: You were required to file if your net earnings from self-employment were $400 or more, or if your church employee income was $108.28 or greater.
- Optional Methods: The IRS allowed two optional methods (farm and nonfarm) to help low-income or loss-reporting taxpayers receive Social Security credits or qualify for the Earned Income Tax Credit.
- 2020 Form Updates: Part III was introduced to allow for the deferral of self-employment tax payments under the COVID-19-related relief provisions of the CARES Act.
For more detailed self-employment tax calculation tips, see our guide on self-employment tax calculation tips.
Step-by-Step (High Level)
The following steps outline how self-employed individuals should complete IRS Schedule SE (Form 1040) (2020):
- Determine Your Net Earnings: Gather your total income from Schedule C, Schedule F, or partnership income, then subtract all deductible business expenses to calculate your net profit.
- Choose the Correct Section: Most filers use Part I; however, you must use Part II if you are applying optional calculation methods or qualifying for specific exemptions such as ministerial income.
- Figure Net Earnings: Multiply your total self-employment income by 92.35% to account for the employer-equivalent portion that is deductible for tax purposes.
- Apply the Social Security Wage Limit: Only the first $137,700 of your net earnings is subject to the Social Security portion of the self-employment tax; all income above this amount remains subject to the Medicare portion.
- Calculate Total Self-Employment Tax: Multiply your adjusted net earnings by 15.3% to determine your total self-employment tax, which includes both Social Security and Medicare taxes.
- Defer Payments (if applicable): Complete Part III if you qualify to defer part of your self-employment tax under the CARES Act relief provisions.
- Transfer to Form 1040: Report your total self-employment tax on Schedule 2 (Form 1040), line 4, and claim a deduction for one-half of that amount on Schedule 1 (Form 1040), line 15, to reduce your adjusted gross income.
For guidance on a range of IRS documents, consult our IRS Form Help Center.
Common Mistakes and How to Avoid Them
Many self-employed individuals make filing errors when completing IRS Schedule SE (Form 1040) (2020). Understanding these mistakes helps you file accurately and avoid penalties:
- Forgetting to File When Required: Some taxpayers with side income assume they do not need to file, but anyone earning $400 or more in net self-employment income is required to file Schedule SE and pay self-employment tax.
- Using Gross Income Instead of Net Earnings: The self-employment tax applies to net profit, not total income, so you must calculate your earnings after deducting business expenses on Schedule C or Schedule F.
- Skipping the 92.35% Adjustment: You must multiply your total self-employment income by 92.35% before applying the tax rate; failing to do so results in overpayment of self-employment tax.
- Ignoring the Social Security Wage Base: If you have both W-2 wages and self-employment income, you may owe less Social Security tax once your combined earnings exceed $137,700.
- Overlooking Optional Methods: If your business had a low profit or loss, you may still qualify for Social Security credits by using the optional methods listed in Part II; self-employed workers often miss this step.
- Misreporting Church or Farm Income: Special rules apply for church employee income and gross farm income, so always review IRS instructions before reporting these figures.
If you've incurred penalties from filing mistakes, learn about IRS penalty abatement options that reduce what you owe.
What Happens After You File IRS Schedule SE (Form 1040) (2020)
Once you file Schedule SE with your individual income tax return, the IRS reviews your calculations and processes your self-employment tax along with your other tax payments. The reported self-employment income is shared with the Social Security Administration to update your Social Security record and determine your future benefits. Electronic filings are processed faster, while paper filings may take several weeks. If the IRS identifies any errors, it will issue a correction notice explaining the changes, any additional tax owed, or any refund adjustments that may be necessary.
Track your filings and tax payments through the IRS Account Transcript Service to ensure your records are up-to-date.
FAQs
Do self-employed individuals still pay self-employment tax after retirement?
Yes, the self-employment tax applies to self-employed individuals even if they already receive Social Security retirement benefits or Medicare coverage.
Can I deduct self-employment tax on my income tax return?
Yes, you can deduct 50% of your self-employment tax when calculating your adjusted gross income, which lowers your taxable income but does not reduce your self-employment tax itself.
What happens if I have both W-2 wages and self-employment income?
You must report both sources of income, but your Social Security tax is limited to the first $137,700 of total earnings; all income remains subject to Medicare tax.
Should I file Schedule SE if I had a net loss?
If you had a net loss, you are generally not required to file Schedule SE unless you want to use optional methods to qualify for Social Security or Earned Income Tax Credit benefits.
