Is Rental Income Subject to Self-Employment Tax?

On top of paying ordinary income tax on earnings, self-employed taxpayers have to pay an additional tax on earnings. At its current rate of 15.3 percent, self-employment taxes can dig into a taxpayer's profit margin. Luckily, rental income usually is not subject to self-employment tax. There are some exceptions, however, for real estate dealers and real estate complex owners that provide services to tenants.

Not Earned Income

Unlike wages from a job or a business you participate in, rental income isn't considered to be earned income. It's not classified as investment income like capital gains, interest and dividends are. Instead, it's considered to be passive income by the IRS, and therefore is not subject to self-employment tax. That means, if you bought a property with the intent to rent it, you're renting out your old home or you own a real estate complex, you won't pay self-employment tax on the income.

Report your rental revenues and rental expenses on Schedule D. Your rental income, which is your total rental revenue less all eligible expenses, flows through to your main form 1040 and is subject to ordinary income tax rates.

Exceptions Subject to Self-Employment Tax

There are a few exceptions to the self-employment tax rule. If you're a real estate dealer, the IRS considers rental income to be earned income and the income is subject to self-employment tax. You're a real estate dealer if you're in the business of buying and selling real estate with the intent to make a profit.

Owners of real estate complexes must report rent as self-employment income if they provide services to the residents. That means that hotel owners almost always have to report rental income as earned income. Apartment complex owners also must report rent as earned income if they provide services -- like maid service -- to the tenants. Paying for utilities like water, trash or electricity are not considered to be services. Trailer park owners must pay the self-employment tax if they provide substantial services, like recreation halls and laundry facilities, to tenants.

If your rental income is considered to be earned income, report it on Schedule C instead of Schedule E. Your net income from business activities, which is your total business revenues less expenses, will be subject to both self-employment tax and ordinary income tax.