The Self-Employed Contributions Act of 1954, or SECA, is the law that authorizes Social Security and Medicare taxes for sole proprietors, partners in partnerships and other self-employed individuals. SECA is the equivalent of the Federal Insurance Contributions Act, or FICA, that authorizes the Internal Revenue Service to collect Social Security and Medicare taxes from employers and employees. SECA taxes are commonly referred to as the self-employment tax.
FICA and SECA Tax Rates
SECA and FICA taxes fund Social Security and Medicare benefits, but they work differently. Employers and employees both pay FICA taxes, usually in equal amounts calculated as percentages of gross earnings. You are both the employer and employee when you are self-employed, so you pay SECA taxes equivalent to what both employer and employee pay.
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As with FICA, the SECA Social Security tax is levied only up to an annual income limit. Any amount earned in excess of the limit isn't subject to Social Security tax, but it continues to be subject to Medicare tax with no income limit.
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Calculating SECA Taxes
SECA taxes are assessed on net earnings from self-employment. To figure the amount of tax due, start with your net pretax profit, which equals revenues minus deductible business expenses. Adjust net profit by multiplying the amount by 92.35 percent to find net earnings. This adjustment excludes the employer-equivalent portion of self-employment tax, which is considered a deductible business expense.
SECA tax rates are 12.4 percent for Social Security and 2.9 percent for Medicare, or 15.3 percent overall, reports the IRS. An additional Medicare tax of 0.9 percent applies only to high-income earners and increases their Medicare tax rate to 3.8 percent. Multiply net earnings by 15.3 percent to find the amount of SECA taxes due. Multiply net earnings in excess of the Social Security tax income limit by the appropriate Medicare tax rate and add the result to the SECA taxes owed.
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Remitting Self-Employment Taxes
The IRS requires taxpayers who expect to owe more than $1,000 in taxes over and above amounts prepaid through payroll taxes to pay estimated taxes on a quarterly schedule. Use Form 1040-ES to report estimated taxes. On the form, estimate your adjusted gross income, deductions and tax credits. Figure the amount of income tax and self-employment taxes you owe.
Estimated taxes are due in April, June, September and January of the next year on the 15th of each month or on the first business day thereafter when the 15th falls on a weekend.
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SECA Taxes and Tax Returns
Although you may file and pay estimated taxes, you still have to file your taxes each year. SECA taxes must be reported using the itemized 1040 form when net earnings from self-employment exceed $400. Self-employed taxpayers usually calculate net profit using Schedule C, Profit or Loss From Business.
You may have self-employment earnings only from working as an independent contractor or similar position. In this case, clients who paid you $600 or more must send you a 1099-NEC form with the amount paid to you listed in box 1.You'll use Schedule C to document any associated business expenses and reduce your taxable self-employment income. You can use Schedule SE, Self-Employment Tax, to figure SECA taxes.