IRS Schedule SE (Self-Employment Tax) with Social Security Limits - Step-by-Step Instruction

IRS Schedule SE is used to report and calculate a taxpayer's self-employment tax. Under the default method, a taxpayer pays self-employment taxes on their net self-employment earnings.

In this example, the taxpayer has W-2 income from a full-time job, and he has a side business where he has self-employed earnings. The taxpayer must calculate his Social Security taxes on the self-employed earnings after factoring in the W-2 wages already subject to Social Security taxes. The amount of earnings subject to social security tax is a combined amount.

Self-employment taxes are a total of 15.3%, which is 12.4% of Social Security taxes and 2.9% of Medicare taxes.

There are two optional methods available (the Nonfarm Optional Method and the Farm Optional Method). Under the Nonfarm optional method, the taxpayer calculates their SE income as the lesser of 6,560 or 2/3 of their gross income from Line 7 of Schedule C.

By making this election, the taxpayer will often pay a greater amount of SE taxes, but it will also make the taxpayer more likely eligible to claim the Earned Income Credit and the Additional Child Tax Credit.

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