<topic sku="biz" tNum="289576" author="sallyh" xmlns="x-schema:hhTopicSchema.xml"><index><title>Learn about self-employment tax on business income</title><category>biz</category><klink type="cncpt">Tell me about self-employment tax on business income</klink></index>
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<p>Self-employment tax is the Social Security and Medicare tax you pay if you are self-employed. When you work as an employee, your employer withholds 7.65% of your pay up to certain limits for Social Security and Medicare tax and pays a matching 7.65% with it. When you are a sole proprietor, however, you pay the entire 15.3% yourself. If you are married, you and your spouse each pay self-employment tax separately on any self-employment income. You generally do not pay self-employment tax on income from real estate rentals and capital gains.</p>
<p>Before your tax is calculated, your total self-employment income from all sources is multiplied by 92.35%. This is an adjustment to make up for the fact that employed taxpayers have half of their Social Security tax and Medicare tax paid by their employer, which has the effect of lowering their income that is subject to Social Security tax and Medicare tax.</p>
<p>You pay 12.4% Social Security tax on the resulting "net income from self-employment," up to a maximum income of $80,400 (in 2001). If you also work as an employee, the maximum amount of self-employment income you pay Social Security tax on is reduced by your wages and tips that are subject to Social Security.</p>
<p>You pay 2.9% Medicare tax on your net income from self-employment. There is no limit for the amount of income on which you pay Medicare tax.</p>
<p>Your combined Social Security tax and Medicare tax is your total self-employment tax. One-half of your self-employment tax is allowed as an adjustment to your taxable income.</p>
<p>Money uses the current IRS rules and rates to estimate self-employment tax on your Schedule C income. You can override this estimate for other tax years or if you have other income subject to self-employment tax, such as farm income or certain miscellaneous income. For more information, see IRS Publication 533, Self-Employment Tax, on the <alink type="xtnl" href="http://www.irs.gov">IRS Web site</alink>.</p>
